GR Engineering Services Limited Annual Report 2015

Plain-text annual report

G R E n g i n e e r i n g S e r v i c e s L i m i t e d A N N U A L R E P O R T 2 0 1 5 ABN 12 121 542 738 ANNUAL REPORT 2015 ChAiRmAN’s LETTER DiRECTORs’ REPORT AUDiTOR’s iNDEPENDENCE DECLARATiON CONsOLiDATED sTATEmENT OF PROFiT OR LOss AND OThER COmPREhENsiVE iNCOmE CONsOLiDATED sTATEmENT OF FiNANCiAL POsiTiON CONsOLiDATED sTATEmENT OF CAsh FLOWs CONsOLiDATED sTATEmENT OF ChANGEs iN EQUiTY NOTEs TO ThE FiNANCiAL sTATEmENTs DiRECTORs’ DECLARATiON iNDEPENDENT AUDiTOR’s REPORT CORPORATE GOVERNANCE sTATEmENT ADDiTiONAL AsX iNFORmATiON CORPORATE DiRECTORY 1 5 22 23 24 25 26 27 68 69 71 78 80 ChaiRman’S lEttER Dear Shareholder It is with pleasure that I present to you GR Engineering Services Limited’s (GR Engineering or Company) Annual report for the year ended 30 June 2015 (FY15). Despite another difficult year for the mining and mining services industries generally, I am very pleased to report that GR Engineering was able to generate record revenue, convert successful operational outcomes into solid profitability and continue to reward shareholders with strong returns in FY15. In addition to being a reflection of the successful implementation of growth strategies enunciated in previous Annual Reports, results for FY15 were also the result of GR Engineering’s processing engineering expertise across a broad range of commodities thereby reducing exposure to market conditions for any one mineral commodity. During the year, the Company’s revenue was generated from projects involving tungsten, tin, iron ore, copper, mineral sands, nickel and gold. The year also saw continued revenue contributions from the oil and gas industry through the Company’s wholly owned subsidiary, Upstream Production Solutions (UPS). Activity during the year was dominated by the construction of Wolf Minerals (UK) Limited’s £75 million Hemerdon Tungsten and Tin processing plant in Devon in the United Kingdom which by 30 June 2015 was nearing completion and commissioning was underway. In November 2014, GR Engineering entered into a $55 million EPC contract with Keysbrook Leucoxene Pty Ltd, a subsidiary of MZI Resources Limited for its Keysbrook Mineral Sands Project in Western Australia. By 30 June 2015, this project was well advanced, running on time and on budget and is due for completion in December 2015. Also in November 2014, the Company’s wholly owned subsidiary, GR Engineering Services Indonesia entered into a $US9 million engineering, procurement and construction management (EPCM) contract with Pt Batatua Raya, a subsidiary of Finders Resources Limited. This copper project is located on Wetar Island in Indonesia and further demonstrates the Company’s ability to utilise a wide range of contracting models to projects located in Australia and overseas. In addition, the Company completed commissioning and operational handover of the moisture reduction plant at Rio Tinto’s Greater Paraburdoo Operations in Western Australia. This $17 million project was also completed on time and on budget and was important in further establishing GR Engineering’s track record in the application of its process engineering expertise to the iron ore industry. The year under review saw a marked increase in study activity with 31 studies completed throughout the year and 14 active studies underway as at 30 June. This higher level of study activity is not only a valuable contributor to better manpower utilisation but is also an important indicator of potential future construction activity. JOE MARIO PAUL RICCIARDO Executive Chairman GR ENGiNEERiNG SERvicES LimiTEd ANNUAL REPORT 2015 1 ChaiRman’S lEttER During FY15, the Company’s wholly owned subsidiary, Upstream Production Solutions continued to deliver results in accordance with expectations despite difficult trading conditions. While significant falls in oil and gas prices during the year resulted in delays and deferrals to anticipated contracts, management has been successful in securing additional work thereby preserving UPS’s trading position. Safety incidents, including a lost time injury incurred on a site operated by UPS in June 2015 served as a salutary reminder to all our employees and contractors of the importance of observing safe work practices and procedures. We recognise that while operational outcomes are important, the safety and wellbeing of our people is paramount and safety considerations are therefore key criteria in our approach to everything we do. GR Engineering generated record consolidated group revenue of $216.9 million in FY15, an increase of $102.7 million or 89.9% over FY14 and Profit Before Tax for the year was $17.2 million, an increase of $0.4 million or 2.4% over FY14. EBITDA increased by $3.0 million or 17.4% over FY14, from $17.2 million to $20.2 million. As at 30 June 2015, the Company held net cash of $63.5 million, trade receivables of $26.0 million and trade payables of $35.4 million. With no significant debt, these balances reflect a strong working capital position at financial year end. Further enhancing the Company’s working capital position is the achievement in May 2015 of more favourable terms under its Bank Guarantee facility with a further limit increase from $30 million to $40 million and importantly, the removal of the requirement for cash backing as security for bank guarantees on issue. Having regard to these factors, your directors have resolved to declare a fully franked dividend of 5.0 cents per share for the half year ended 30 June 2015, bringing the full year payment to 9.5 cents per share. This represents an increase of 35.7% over the 7.0 cents per share dividend paid in relation to FY14 and an increase of 90.0% over the 5.0 cents per share paid in relation to FY13. The Company heads into the new financial year buoyed by strong order book. On 05 May 2015 GR Engineering was awarded the $114 million engineering, procurement and construction (EPC) contract for the design and construction of the processing facility and paste fill plant for Sirius Resources NL’s Nova Nickel Project in Western Australia. Work on this project commenced immediately and is scheduled for completion in November 2016. The Nova Nickel project is one of Australia’s most significant base metal projects of recent years and we look forward to working with Sirius on its successful delivery. Together with revenue associated with bringing to completion the projects mentioned earlier and other parcels of work on hand, GR Engineering has good revenue visibility to the end of FY16 and into FY17. Nevertheless we remain focused on pursuing and winning additional work to fully utilise the Company’s operational and financial capacity. It is pleasing that despite difficulties facing our sector GR Engineering has continued to deliver solid and consistent financial returns to shareholders in FY15 and has grounds for a positive outlook for FY16. I recognise the hard work and dedication of our employees and contractors and the confidence placed in us by our clients in making these outcomes possible. Finally I would also like to thank my fellow directors for their insightful guidance and counsel throughout FY15. JOE MARIO PAUL RICCIARDO Executive Chairman 2 ContinuedRevenue EBITDA +90% FY15 $216.9 million +18% FY15 $20.3 million Profit Before Tax +2% FY15 $17.2 million Cashflow from Operations +127% FY15 $42.5 million Dividends Paid Net Cash +36% FY15 9.5 cents per share +72% FY15 $63.5 million GR ENGiNEERiNG SERvicES LimiTEd ANNUAL REPORT 2015 3 Upstream Production Solutions is a leading provider of products and services to the oil and gas industry with a reputation for safe, reliable solutions to production challenges. 4 DIRECTORS’ REPORTContinuedDiRECtORS’ REPORt Your Directors present their report together with the financial statements of GR Engineering Services Limited (“GR Engineering” or “consolidated entity”) for the financial year 1 July 2014 to 30 June 2015 and the independent auditor’s report thereon. The names of the consolidated entity’s Directors in office during the financial year ended 30 June 2015 and until the date of this report are as below. Directors were in office for this entire period unless otherwise stated. DIRECTORS Geoffrey (Geoff) Michael JONES (Managing Director) Joseph (Joe) Mario Paul RICCIARDO (Non-Executive Chairman) Tony Marco PATRIZI (Executive Director) Barry Sydney PATTERSON (Non-Executive Director) Terrence John STRAPP (Non-Executive Director) Peter John HOOD (Non-Executive Director) COMPANY SECRETARY Giuseppe (Joe) TOTARO (B.Comm, CPA, CTA) Joe is a co-founder of GR Engineering and has been Company Secretary since 4 September 2006. He was appointed Chief Financial Officer on 19 April 2011. Joe is a certified practicing accountant (CPA) with over 29 years’ experience in commercial and public practice specialising in mining and mining services. He was formerly company secretary of and business consultant to JR Engineering. Joe’s experience includes corporate advisory services having consulted on and managed numerous corporate transactions involving private and publicly listed companies. PRINCIPAL ACTIVITIES During the financial period the consolidated entity’s activities have been the provision of high quality process engineering design and construction services to the mining and mineral processing industry and the provision of operations, maintenance and well management services to the oil and gas sector. DIVIDENDS PAID DURING THE YEAR • Fully franked dividend of 4.00 cents per share paid on 30 September 2014 • Fully franked dividend of 4.50 cents per share paid on 30 March 2015 • Subsequent to 30 June 2015, a fully franked dividend of 5.00 cents per share was recommended by the Directors to be paid on 25 September 2015. 5 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015 REVIEW OF OPERATIONS The financial year ended 30 June 2015 (FY15) was a record revenue year for GR Engineering Services Limited. This positive outcome was made possible by the consolidated entity’s established track record of project delivery and our in-house ability to provide whole of project solutions, from feasibility study stage through to lump sum engineering design and construction. This holistic approach sets GR Engineering apart from many of its competitors as it provides clients with clear lines of accountability and creates certainty on timing, performance and price. Operationally, a feature of FY15 was the construction of Wolf Minerals (UK) Limited’s £75 million Hemerdon Tungsten and Tin Project located in Devon, England. As at 30 June 2015, this project was nearing completion and commissioning of the processing facility was underway. This result is a testament to the project team and to the efficiency and productivity of the many local subcontractors who have worked on the safe and on budget execution of this project. In Western Australia, work was successfully completed on a $16.8 million moisture reduction brownfields project at Paraburdoo. This was an important project to GR Engineering which had been seeking opportunities to utilise its capabilities in iron ore processing. The consolidated entity remains focused on securing additional optimisation and other value adding opportunities in the iron ore sector over the coming years. In November 2014, GR Engineering entered into a $55 million engineering, procurement and construction (EPC) contract with Keysbrook Leucoxene Pty Ltd, a subsidiary of MZI Resources Limited for its Keysbrook Mineral Sands Project in Western Australia. This project involves the construction of a wet concentrator plant located at the Keysbrook mine site and the expansion of an existing mineral separation plant in Picton. By 30 June 2015, this project was well advanced, running on time and on budget and is due for commissioning in the fourth quarter of 2015. Also in November 2014, the consolidated entity was awarded a US$9 million engineering, procurement and construction management (EPCM) contract for the design and construction of the Wetar Copper Project expansion for PT Batutua Tembaga Raya. This project involves the design and construction management of a copper processing facility on Wetar Island, Indonesia. GR Engineering continues to pursue near term EPCM contracting opportunities and to apply its EPC contracting disciplines to the delivery of successful EPCM outcomes. The consolidated entity’s specialist EPCM team has established a sound record in EPCM delivery, including the on time and on budget completion in the first half of FY15 of the Syama Gold Project Oxide Circuit in Mali for Resolute Mining Limited. In May 2015 GRES was awarded the $114 million EPC contract by Sirius Resources NL (Sirius) for the engineering, procurement and construction of the processing facility associated with the Nova Nickel Project in Western Australia. Work on this project commenced immediately upon award and is due for completion in November 2016. Subsequent to balance date, in July 2015, GR Engineering was awarded an additional $12 million EPC contract by Sirius for the design and construction of the Nova Nickel Project’s non-process infrastructure, bringing the total value of contracted works associated with the Nova Nickel Project to $126 million. Also subsequent to the balance date, GR Engineering entered into an EPC contract with Western Areas Limited associated with the Forrestania Mill Recovery Enhancement Project in Western Australia. The Contract has been entered into on a guaranteed maximum price basis. The total value of the work under the Contract is approximately $22 million, subject to further commitments being made by Western Areas. With the exception of the Western Areas contract, all contracts listed above are with first time clients thereby creating valuable opportunities to establish new long term commercial relationships and the potential for repeat business. These engagements also add to the suite of commodities to which GR Engineering’s process engineering skills are applied thereby broadening its market base. During FY15, 31 studies involving a wide range of commodities were completed and as at 30 June 2015, the consolidated entity was engaged on a further 14 studies. This level of study activity is encouraging as it serves as an indicator of potential future construction opportunities. In addition, a solid base load of study activity facilitates efficient manpower utilisation and therefore greater overhead absorption. In FY15 GR Engineering’s wholly owned subsidiary, Upstream Production Solutions (Upstream PS) continued to deliver results in line with expectations, notwithstanding difficult trading conditions. International oil and gas prices declined markedly during FY15 resulting in the delay and deferral of anticipated projects. Nevertheless, management was successful in securing new engagements predominantly in Queensland, thereby enabling Upstream PS to meet budgeted revenue expectations. Upstream PS generated $31.2 million in revenue in FY15 and EBITDA in FY15 was $1.8 million. 6 DIRECTORS’ REPORTContinuedSafety incidents, including a lost time injury, served as a salutary reminder to all our employees and contractors of the importance of observing safe work practices and procedures. We recognise that while operational outcomes are important, the safety and wellbeing of our people is paramount and safety considerations are therefore key criteria in our approach to everything we do. Looking ahead, GR Engineering enters FY16 with a solid order book dominated by Australian based projects and good revenue visibility through to FY17. As at the date of this report, contracted revenue for FY16 stood at $195 million (excluding contributions from Upstream PS). Despite the increased levels of contracted revenue and utilisation, the consolidated entity retains the operational and financial capacity to execute additional work and is working diligently to close out existing near term opportunities and to pursue new business in Australia and abroad. FINANCIAL POSITION The consolidated entity generated revenue of $216.9 million and net operating cash flow of $42.5 million for the year ended 30 June 2015. During FY15, the consolidated entity paid dividends totalling $12.8 million and as at 30 June 2015 held cash totalling $64.6 million, an increase of $32.4 million over the balance held as at 30 June 2014. Pursuant to an agreement entered with the consolidated entity’s Bankers in April 2015 the requirement to secure bank guarantees with cash equating to one quarter of the value of bank guarantees on issue was removed. At the end of FY15, the consolidated entity held trade debtors of $26.0 million, trade creditors of $35.4 million and short and long term debt of $1.1 million. GROWTH STRATEGY The consolidated entity’s growth strategy continues to be based on the following key areas: • Pursue EPC process engineering and construction opportunities in precious and base metals in Australia and abroad; • Seek to grow the consolidated entity’s track record of applying process engineering solutions to iron ore processing; • Develop and further promote the consolidated entity’s EPCM capabilities; • Provide management and financial support to Upstream PS so as to facilitate growth in the provision of operations and maintenance services to the oil and gas industry; • Assess and pursue acquisitions to the extent that they meet the consolidated entity’s investment criteria; and • Pursue increased market share by promoting the consolidated entity’s ability to deliver a complete suite of in house EPC/EPCM contracting capabilities. This strategy has served GR Engineering well, as evidenced by the operational outcomes outlined earlier in this report, which have contributed to record revenue in FY15. The consolidated entity’s management will continue to apply the human and financial resources needed to maintain momentum in its continued implementation of its growth strategy. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS In March 2015, Assetinsure Pty Ltd agreed to increase GR Engineering’s insurance bond facility from $20 million to $30 million. In May 2015 the consolidated entity entered into an agreement with National Australia Bank providing for an increase in the consolidated entity’s Bank Guarantee Facility from $30 million to $40 million. The terms of the increased Bank Guarantee Facility include, inter alia, the removal of the requirement for Letters of Set Off against term deposits equating to one quarter of the value of Bank Guarantees on issue as security under the facility. In July 2015, GR Engineering was awarded an additional $12 million EPC contract by Sirius for the design and construction of the Nova Nickel Project’s non-process infrastructure, adding an additional $12 million to revenue under the project. Also in July 2015, the consolidated entity entered into a $22 million EPC contract with Western Areas Limited (Western Areas) for its Forrestania Mill Recovery Enhancement Project. 7 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015FUTURE DEVELOPMENTS Information regarding likely developments in the operations of the consolidated entity in future financial years is referred to in the Review of Operations and Growth Strategy in above sections of this Directors’ Report. EVENTS AFTER BALANCE SHEET DATE On 20 August 2015, the consolidated entity declared a fully franked dividend of 5.0 cents per share, an aggregate of $7,536,627. The Record Date of the dividend is 11 September 2015 and the proposed payment date is 25 September 2015. BOARD OF DIRECTORS Joseph (Joe) Mario Paul RICCIARDO – Non-Executive Chairman BAppSc (Mech Eng) Joe co-founded GR Engineering. He is a Mechanical Engineer with over 35 years’ experience in feasibility studies, design, construction, maintenance and operation of mineral processing facilities. In 1986 Joe lead the founding of JR Engineering. As Managing Director, Joe successfully grew JR Engineering into a leading engineering services provider before its sale to a major ASX listed Mining Services Group in 2001. In 2006, Joe was instrumental in regrouping the former key executives from JR Engineering to establish GR Engineering. Joe is a non-executive director of Mineral Resources Limited and has been on its Board since its public listing in 2006. • • Interests in ordinary shares in GR Engineering – 9,798,578 Interests in other securities in GR Engineering – None • Special Responsibilities: – Non-Executive Chairman • Directorships in other listed entities in the last 3 years: – Mineral Resources Limited (ASX:MIN) 2006 – Present Geoffrey (Geoff) Michael JONES – Managing Director BE (Civil), FIEAust, CPEng Geoff is a Civil Engineer with over 30 years’ experience in construction, engineering, minerals processing and project development in Australia and overseas. Geoff previously worked for Baulderstone Hornibrook, John Holland, Minproc Engineers and Signet Engineering before serving over six years as Group Project Engineer for Resolute Mining Limited. Prior to joining GR Engineering Services Limited in 2011, Geoff was the General Manager of Sedgman Limited’s metals engineering business and also responsible for the strategic development of the metals engineering division internationally. Geoff is currently the Non-executive Chairman of Marindi Metals Limited (previously Brumby Resources Limited), a non-executive director of Azumah Resources Limited and a non-executive director of Energy Metals Limited. • • Interests in ordinary shares in GR Engineering – 1,182,531 Interests in other securities in GR Engineering: Share Appreciation Rights – 942,064 • Special Responsibilities: – Managing Director • Directorships in other listed entities in the last 3 years: – Marindi Metals Limited (ASX:MZN) 2015 – Present – Brumby Resources Limited (ASX:BMY) 2006 – 2015 – Azumah Resources Limited (ASX:AZM) 2009 – Present – Energy Metals Limited (ASX:EME) 2008 – Present 8 DIRECTORS’ REPORTContinuedTony Marco PATRIZI – Executive Director BE (Mech Eng) Tony co-founded GR Engineering. Tony is a Mechanical Engineer with over 30 years’ experience in the mining and minerals processing industries as a company director, operations manager, and project manager and maintenance engineer. Tony was previously the operations manager of JR Engineering which had over 300 personnel and provided workshop, maintenance, engineering and construction services to mining and mineral processing projects in Western Australia and interstate. • • Interests in ordinary shares in GR Engineering – 9,795,000 Interests in other securities in GR Engineering – None • Directorships in other listed entities – None Barry Sydney PATTERSON – Non-Executive Director ASMM, MIMM, FAICD Barry is a Mining Engineer with over 50 years’ experience in the mining industry and is a co-founder of GR Engineering. He co-founded contract mining companies Eltin, Australian Mine Management and National Mine Management. Barry was also a co-founder of JR Engineering Services Pty Ltd. Barry has served as a director of a number of public companies across a range of industries. He was formerly a non- executive chairman of Sonic Healthcare Limited and Silex Systems Limited and is currently a Non-Executive Director of Dacian Gold Limited. • • Interests in ordinary shares in GR Engineering – 10,500,000 Interests in other securities in GR Engineering – None • Special Responsibilities: – Chairman of the Remuneration and Nominations Committee – Member of the Audit and Risk Committee – Non-Executive Director • Directorships in other listed entities in the last 3 years: – Dacian Gold Limited (ASX:DCN) 2012 – Present GR ENGiNEERiNG SERvicES LimiTEd ANNUAL REPORT 2015 9 Terrence (Terry) John STRAPP – Non-Executive Director CPA, FFin., MAICD Terry has extensive experience in banking, finance and corporate risk management and has over 30 years’ experience in the mining and resource industry. He was formerly a non-executive director of The Mac Services Group Limited (resigned 2010). Terry is a non-executive director of Ausdrill Limited. • • Interests in ordinary shares in GR Engineering – 380,000 Interests in other securities in GR Engineering – None • Special Responsibilities: – Chairman of the Audit and Risk Committee – Member of the Remuneration and Nominations Committee • Directorships in other listed entities in the last 3 years: – Ausdrill Limited (ASX:ASL) 2005 – Present Peter John HOOD – Non-Executive Director BE(Chem), MAusIMM, FlChemE, FAICD Peter is a Chemical Engineer and has over 40 years’ experience in the resource and energy sectors. He was formerly the chief executive officer of Coogee Chemicals and then oil and gas operator, Coogee Resources. Prior to that he served in senior management and project development roles for WMC Ltd in nickel and gold production. Peter has considerable board experience and is currently Chairman of Matrix Composites and Engineering Ltd, Deputy President of the Australian Chamber of Commerce and Industry, Immediate Past President of the Chamber of Commerce and Industry of Western Australia and former Chairman of Apollo Gas Ltd. • • Interests in ordinary shares in GR Engineering – 500,000 Interests in other securities in GR Engineering – None • Special Responsibilities: – Member of the Audit and Risk Committee – Member of the Remuneration and Nominations Committee • Directorships in other listed entities in the last 3 years: – Matrix Composites & Engineering Limited (ASX:MCE) 2011 – Present 10 DIRECTORS’ REPORTContinuedMEETINGS OF DIRECTORS The number of Meetings of the Board of Directors held during the year ended 30 June 2015 and the number attended by each director are as follows: FULL mEETiNGS OF diREcTORS Eligible Attended Barry Patterson Joe Ricciardo Geoff Jones Tony Patrizi Terrence Strapp Peter Hood 11 11 11 11 11 11 10 10 11 11 10 11 Meetings of the Audit and Risk Committee were held on 22 August 2014 and 20 February 2015. These meetings were attended by the Chairman of the Audit and Risk Committee Terrence Strapp, members of the Audit and Risk Committee Barry Patterson and Peter Hood, and Chief Financial Officer Joe Totaro. No formal meeting of the Remuneration and Nominations Committee was held during the year ended 30 June 2015 as its members elected to address matters for its consideration within the context of meetings of the full Board of Directors. OPTIONS As at the date of this report, there were no unissued ordinary shares of GR Engineering under option. SHARE APPRECIATION RIGHTS As at the date of this report, Share Appreciation Rights granted are as follows: Grant date vesting & Exercise date Exercise price 12 November 2013 12 November 2013 12 November 2013 30 June 2016 30 June 2017 30 June 2018 Nil Nil Nil Quantity 432,433 296,297 213,334 For full particulars of the Share Appreciation Rights issued to Directors as remuneration, refer to the Remuneration Report. PERFORMANCE RIGHTS As at the date of this report, the unissued ordinary shares of GR Engineering which are the subject of unvested Performance Rights are as follows: Grant date No. Performance Rights Exercise price Quantity 21 September 2015 1,690,000 21 September 2015 4 October 2015 31 March 2016 13 May 2016 31 March 2017 31 March 2018 31 March 2019 25,000 127,500 50,000 127,500 127,500 127,500 4 October 2015 31 March 2016 13 May 2016 31 March 2017 31 March 2018 31 March 2019 – – – – – – – The Performance Rights holders do not have any right to participate in any issues of shares or other interests in the consolidated entity or any other entity. No shares were issued during the financial year ended 30 June 2015 due to the vesting of Performance Rights. 11 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015INDEMNIFYING OFFICERS OR AUDITORS During the financial year, the consolidated entity paid insurance premiums relating to contracts insuring the directors and company secretary against liability which may arise in connection with them acting as Director or Company Secretary, to the extent permitted under the Corporations Act. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. LEGAL PROCEEDINGS No person has applied for leave of court to bring proceedings on behalf of the consolidated entity or intervene in any proceedings to which the consolidated entity is a party for the purpose of taking responsibility on behalf of the consolidated entity for all or any part of those proceedings. NON AUDIT SERVICES The Board of Directors is satisfied that the provision of non-audit services during the year is consistent with the general standard of independence imposed by the Corporations Act 2001. Non-audit services were reviewed by the Board to ensure they do not compromise the objectivity of the Auditor and to ensure the nature of services provided is not inconsistent with the principals of auditor independence. Set out in APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board. During the year ended 30 June 2015 fees amounting to $56,700 were paid to Deloitte Touche Tohmatsu for non- audit services including taxation advice. AUDITOR’S INDEPENDENCE DECLARATION The Auditor’s Independence Declaration for the year ended 30 June 2015 has been reviewed and can be found at page 18 of the annual financial report. ENVIRONMENTAL ISSUES In conducting its business, the consolidated entity is required to obtain permits and licences from relevant state environment protection authorities. It is of paramount importance to management and the Board of Directors that as well as operating within its own Environmental Policies, the consolidated entity observes all relevant licences in good standing. The consolidated entity has not been made aware of any areas of non-compliance in this regard. The consolidated entity is not subject to the Energy Efficiency Opportunities Act 2006 as it does not meet the energy use threshold specified in Section 10 of that legislation. The consolidated entity’s energy consumption will be monitored and will register under the act if and when the energy use threshold is exceeded. 12 DIRECTORS’ REPORTContinuedREMUNERATION REPORT – AUDITED The remuneration report details the amount and nature of the remuneration for the consolidated entity’s key management personnel. Directors • Geoff Jones (Managing Director) • Joe Ricciardo (Non-Executive Chairman) • Tony Patrizi (Executive Director) • Barry Patterson (Non-Executive Director) • Terrence Strapp (Non-Executive Director) • Peter Hood (Non-Executive Director) Executives • David Sala Tenna (General Manager – EPC) • Joe Totaro (Chief Financial Officer & Company Secretary) • Rodney Schier (Engineering Manager) • Paul Newling (General Manager – EPCM) Unless otherwise stated the named persons held their current position for the whole financial year and since the end of the financial year. At the consolidated entity’s 2014 Annual General Meeting, 93% of eligible shareholders voted in favour of the remuneration report. No specific comments were made regarding the remuneration report at the meeting. REMUNERATION POLICY The consolidated entity’s remuneration policy has been designed to attract and retain high calibre key employees whose personal interests are aligned with success and growth of the consolidated entity and therefore shareholders. This will be achieved by: • Staying abreast of labour market forces thereby ensuring remuneration offered by the consolidated entity is competitive and remains so through a process of annual review. • Devising performance based remuneration programmes. • Utilising the consolidated entity’s Equity Incentive Plan and/or Employee Share Option Plan. NON-EXECUTIVE DIRECTORS The consolidated entity’s policy is to remunerate non-executive directors according to market rates and to reflect the time dedicated to their position and special responsibilities involved. GR Engineering’s Constitution provides that the Directors shall be paid out of the funds of the consolidated entity by way of remuneration for services such sums as may from time to time be determined by the consolidated entity in General Meeting, to be divided among the Directors in such proportions as they shall from time to time agree or in default of agreement, equally. Directors are encouraged to hold shares in the consolidated entity to align their personal objectives with the growth and profitability of the consolidated entity. EXECUTIVE DIRECTORS Executive Directors’ pay and reward is comprised of a competitive base salary. To the extent that executive directors are shareholders in the consolidated entity, their personal objectives are aligned with the performance of the consolidated entity. 13 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015SENIOR EXECUTIVES Executives’ remuneration is comprised of a competitive base salary, performance bonuses and share based incentive payments (at the discretion of the board). The Managing Director, Geoff Jones is also incentivised through the issue of performance based Share Appreciation Rights and is eligible to participate in the GR Engineering Services Limited Equity Incentive Plan. All executive remuneration packages are reviewed annually to ensure they remain competitive and reflect performance. Remuneration paid to directors and executives is valued at cost to the consolidated entity. Options, Performance Rights and Share Appreciation Rights are valued using the Black Scholes and Monte Carlo methods. EMPLOYMENT DETAILS OF MEMBERS OF KEY MANAGEMENT PERSONNEL Name Title contract details Joe Ricciardo Non-Executive Chairman Termination: 3 months notice by the consolidated entity or employee Tony Patrizi Executive Director Termination: 3 months notice by the consolidated entity or employee Barry Patterson Non-Executive Director Terrence Strapp Non-Executive Peter Hood Director Non-Executive Director By rotation and re-election By rotation and re-election By rotation and re-election Geoff Jones Managing Director Fixed term to 30 June david Sala Tenna General Manager – EPC Joe Totaro Company Secretary/Chief Financial Officer Rodney Schier Engineering Manager Paul Newling General Manager – EPCM 2018. Termination: 6 months notice by the consolidated entity and 3 months notice by the employee Termination: 3 months notice by the consolidated entity or employee Termination: 3 months notice by the consolidated entity or employee Termination: 3 months notice by the consolidated entity or employee Termination: 3 months notice by the consolidated entity or employee Non Salary cash incentives Shares/ Units Options/ Rights Fixed Salary Total – – – – – – – – – – – – - – – – – – – – – – – – – 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 25.1% 74.9% 100% – – – 100% 100% 100% 100% 100% 100% 1.4% 98.6% 100% The terms and conditions upon which key employees are employed are set out in contracts of employment. These contracts provide for minimum notice periods prior to termination and, in some cases restrictive covenants upon termination. The consolidated entity can terminate the contract at any time in the case of serious misconduct and termination payments may be paid in lieu of notice period. 14 DIRECTORS’ REPORTContinuedREMUNERATION DETAILS FOR THE YEAR ENDED 30 JUNE 2015 – BOARD OF DIRECTORS Short Term Benefits Post Employment Benefits Equity Based Payments Super- Sub Total annuation Other * Equity Options Total Performance Based cash Salary & Fees $ Non cash Payments ** $ $ $ EXEcUTivE diREcTORS Tony Patrizi 2015 2014 Geoff Jones 2015 2014 287,213 13,809 301,022 27,285 287,616 14,017 301,633 17,774 457,303 30,117 487,420 18,783 457,225 24,075 481,300 17,774 NON-EXEcUTivE diREcTORS Joe Ricciardo *** 2015 2014 59,266 70,663 7,352 8,203 66,618 78,866 Barry Patterson 2015 2014 57,000 57,000 Terrence Strapp **** 2015 2014 Peter Hood 2015 2014 62,700 57,000 57,000 57,000 TOTAL diREcTORS – – – – – – 57,000 57,000 62,700 57,000 57,000 57,000 5,630 6,536 5,415 5,272 5,415 5,272 5,415 5,272 2015 2014 980,482 51,278 1,031,760 67,943 986,504 46,295 1,032,799 57,900 $ – – – – – – – – – – – – – – $ – – $ – – $ % 328,307 319,407 0.0% 0.0% 130,588 38,997 675,788 366,098 96,904 962,076 25.1% 48.1% – – – – – – – – – – – – – – – – 72,248 85,402 62,415 62,272 68,115 62,272 62,415 62,272 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 130,588 38,997 1,269,288 366,098 96,904 1,553,701 13.4% 29.8% “Other” amounts relate to performance based bonus payments, as approved by the board “Non-Cash payments” refer to reportable fringe benefits (fuel for personal vehicles and novated leases) * ** *** Reduction in benefits due to change in role to Non- Executive Chairman **** Paid to SDG Nominees Pty Ltd, an entity controlled by Terrence Strapp 15 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015REMUNERATION DETAILS FOR THE YEAR ENDED 30 JUNE 2015 – EXECUTIVES Short Term Benefits Post Employment Benefits Equity Based Payments cash Salary & Fees $ Non cash Payments ** $ Super- Sub Total annuation Other * Equity Options Total Performance Based $ $ SENiOR EXEcUTivES david Sala Tenna – General manager – EPc 2015 2014 331,193 343,224 5,211 7,551 336,404 31,463 350,775 17,774 Joe Totaro – company Secretary & chief Financial Officer 2015 2014 260,869 224,855 9,459 9,582 270,328 24,782 234,437 20,799 Rodney Schier – Engineering manager 2015 2014 261,468 261,468 5,121 8,288 266,589 24,839 269,756 24,185 Paul Newling – General manager EPcm 2015 2014 420,222 449,224 3,853 5,067 424,075 18,783 454,291 17,774 TOTAL SENiOR EXEcUTivES 2015 2014 1,273,752 23,644 1,297,396 99,867 1,278,771 30,488 1,309,259 80,532 TOTAL diREcTORS 2015 2014 2,254,234 74,922 2,329,156 167,810 2,265,275 76,783 2,342,058 138,432 $ – – – – – – – – – – – – $ – – – – – – 6,497 6,497 6,497 6,497 $ – – – – – – – – – – $ % 367,867 368,549 295,110 255,236 291,428 293,941 449,355 478,562 1,403,760 1,396,288 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.4% 1.4% 0.5% 0.5% 137,085 38,997 2,673,048 6.6% 372,595 96,904 2,949,989 15.9% * ** “Other” amounts relate to performance based bonus payments, as approved by the board “Non-Cash payments” refer to reportable fringe benefits (fuel for personal vehicles and novated leases) 16 DIRECTORS’ REPORTContinuedLONG TERM INCENTIVES Employee Share Option Plan The consolidated entity has established an employee share option plan (ESOP). The consolidated entity may offer options to subscribe for shares in the consolidated entity to eligible persons subject to the ESOP rules. Options offered under the ESOP are to be offered on such terms as the board determines and the offer must set out specified information including the number of options, the period of the offer, calculation of the exercise price and any exercise conditions. The exercise price is to be determined by the Board in its absolute discretion and set out in the offer provided that the exercise price is not less than the average market price on ASX on the five trading days prior to the day the Directors resolve to grant the option(s). Equity Incentive Plan The GR Engineering Services Limited Equity Incentive Plan (Plan) was adopted by the Board on 28 March 2012. In accordance with the Listing Rules of the Australian Securities Exchange (ASX), shareholder approval of the Plan was obtained at the consolidated entity’s Annual General Meeting held on 30 November 2012. Under the ASX Listing Rules and Corporations Act 2001 (Cth), the issue of securities under the Plan to directors will be subject to separate shareholder approval. At the discretion of the Board, all eligible employees of the consolidated entity or eligible consultants may participate in the Plan. Non-executive directors are not eligible to participate in the Plan. The Plan is designed to align the interests of executives and employees with the interests of shareholders by providing an opportunity to receive an equity interest in the consolidated entity and therefore direct participation in the benefits of future consolidated entity performance over the medium to long term. This is achieved by awarding both or either: • Performance Rights (PR), with each PR being a right to acquire one fully paid ordinary share of the consolidated entity and vesting upon the satisfaction of certain performance conditions; and • Share Appreciation Rights (SARs), being rights to receive a future payment in shares, based on to the amount of increase in market value of one share in the consolidated entity in a specified period between the grant of the SAR and exercise of that SAR. Securities issued under the Plan will be subject to vesting criteria as determined by the Board and have a term of 3 years (or such term as otherwise agreed by the Board). During the year ended 30 June 2015 no Performance Rights were issued and 20,000 were forfeited in accordance with the terms and conditions of the Plan. A total of 2,295,000 Performance Rights were on issue as at 30 June 2015. Grant date 11 Sep 2012 4 Oct 2012 13 May 2013 30 Apr 2014 30 Apr 2014 30 Apr 2014 30 Apr 2014 vesting date Expiry date Exercise Price Number Fair value 21 Sep 2015 21 Sep 2015 4 Oct 2015 4 Oct 2015 13 May 2016 13 May 2016 31 Mar 2016 31 Mar 2016 31 Mar 2017 31 Mar 2017 31 Mar 2018 31 Mar 2018 31 Mar 2019 31 Mar 2019 Nil Nil Nil Nil Nil Nil Nil 1,710,000 25,000 50,000 127,500 127,500 127,500 127,500 $0.637 $0.689 $0.459 $0.571 $0.511 $0.458 $0.410 The Performance Rights issued or lapsed in the current financial year do not relate to key management personnel. 17 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015The following share-based payment compensation relates to Share Appreciation Rights issued to directors and senior management: Name Geoff Jones Grant date vesting date date Exercised Number of Shares issued on vesting date Exercise Price $ Quantity % of compensation for the Year consisting of Share Appreciation Rights Fair value $ 12 Nov 2013 30 Jun 2014 30 Jun 2014 407,949 12 Nov 2013 30 Jun 2015 30 Jun 2015 324,582 12 Nov 2013 30 Jun 2016 12 Nov 2013 30 Jun 2017 12 Nov 2013 30 Jun 2018 Nil Nil Nil Nil Nil 1,600,000 $0.1774 727,273 $0.1827 432,433 $0.1761 296,297 $0.1619 213,334 $0.1508 38.0% 19.3% RELATIONSHIP BETWEEN COMPANY PERFORMANCE AND REMUNERATION POLICY The table below sets out summary information about the consolidated entity’s earnings and movements in shareholder wealth for the 5 years to 30 June 2015: Revenue ($000's) 142,512 152,838 2011 2012 Net profit before tax ($000's) Net profit after tax ($000's) Share price at year end ($) dividend ($000's) EPS (cents) diluted EPS (cents) 29,247 21,098 1.95 19,000 16.76 16.75 19,858 13,115 0.90 12,000 8.74 8.74 2013 114,695 11,476 7,539 0.46 9,000 5.03 4.97 2014 2015 114,183 216,893 16,787 14,164 0.70 9,000 9.44 9.26 17,196 12,938 0.90 12,785 8.60 8.42 Messrs Ricciardo and Patrizi, a Non-Executive Director, two senior executives and four key employees hold significant shareholdings in the consolidated entity. As a result the performance of the consolidated entity and the personal and financial interest of its executive and management team are aligned. The consolidated entity has issued Share Appreciation Rights to its Managing Director Geoff Jones which are designed to incentivise the Managing Director and align his interests with those of all shareholders. The ESOP and Plan have been adopted by the consolidated entity and will be implemented as the Nomination and Remuneration Committee identify the need to remunerate either existing or future employees, key employees, executives or executive directors on a performance basis. 18 DIRECTORS’ REPORTContinuedSHAREHOLDING The number of shares in the parent entity held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: 2015 Ordinary shares Joe Ricciardo Tony Patrizi Barry Patterson Terry Strapp Peter Hood Geoff Jones david Sala Tenna Joe Totaro Rodney Schier Paul Newling 2014 Ordinary shares Joe Ricciardo Tony Patrizi Barry Patterson Terry Strapp Peter Hood Geoff Jones david Sala Tenna Joe Totaro Rodney Schier Paul Newling Balance at the start of the year Received as part of remuneration Additions/ other disposals/ other Balance at the end of the year 9,798,578 9,795,000 10,500,000 380,000 500,000 857,949 13,825,000 9,500,000 8,100,000 – – – – – – 324,582 – – – – 63,256,527 324,582 – – – – – – – – – – – – – – – – – – – – – – 9,798,578 9,795,000 10,500,000 380,000 500,000 1,182,531 13,825,000 9,500,000 8,100,000 – 63,581,109 Balance at the start of the year Received as part of remuneration Additions/ other disposals/ other Balance at the end of the year 9,798,578 9,795,000 10,500,000 300,000 500,000 400,000 13,825,000 9,500,000 8,100,000 – – – – – – – – – 80,000 – 407,949 50,000 – – – – – – – – 62,718,578 407,949 130,000 – – – – – – – – – – – 9,798,578 9,795,000 10,500,000 380,000 500,000 857,949 13,825,000 9,500,000 8,100,000 – 63,256,527 19 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015OTHER TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL During the year ended 30 June 2015 the consolidated entity leased office space at 71-73 Daly Street from Ashguard Pty Ltd. Directors of the consolidated entity, namely Joe Ricciardo, Tony Patrizi, and Barry Patterson, each have a non controlling interest in Ashguard Pty Ltd. The total amount invoiced by Ashguard Pty Ltd in the year ended 30 June 2015 amounted to $314,263 including GST (2014: $300,847). The balance payable at 30 June 2015 is $46,054 (2014: $22,570). During the year ended 30 June 2015 the consolidated entity procured items for Ashguard Pty Ltd. The total amount invoiced to Ashguard Pty Ltd in the year ended 30 June 2015 was $10,998 including GST (2014: Nil). The balance outstanding at 30 June 2015 is Nil (2014: Nil). During the year ended 30 June 2015 the consolidated entity procured items and hired equipment from PIHA Pty Ltd (a subsidiary of Mineral Resources Limited), a company in which Joe Ricciardo is a non-executive director. The total amount invoiced by PIHA Pty Ltd in the year ended 30 June 2015 amounted to $240,664 including GST (2014: Nil). The balance payable at 30 June 2015 is $237,936 (2014: Nil). During the year ended 30 June 2015 the consolidated entity provided engineering services and procurement of materials for PIHA Pty Ltd. The total amount invoiced to PIHA Pty Ltd in the year ended 30 June 2015 was $41,083 including GST (2014: $80,300). The balance outstanding at 30 June 2015 is Nil (2014: $48,180). During the year ended 30 June 2015 the consolidated entity provided engineering services and procurement of materials for Crushing Services International Pty Ltd (a subsidiary of Mineral Resources Limited), a company in which Joe Ricciardo is a non-executive director. The total amount invoiced to Crushing Services International Pty Ltd in the year ended 30 June 2015 was $151,580 including GST (2014: $153,274). The balance outstanding at 30 June 2015 is Nil (2014: Nil). During the year ended 30 June 2015 the consolidated entity provided engineering services and procurement of materials for Azumah Resources Limited, a company in which Geoff Jones is a non-executive director. The total amount invoiced to Azumah Resources Limited in the year ended 30 June 2015 was $204,886 including GST (2014: $26,848). The balance outstanding at 30 June 2015 is Nil (2014: $19,750). During the year ended 30 June 2015 the consolidated entity provided engineering services and procurement of materials for Optiro Pty Ltd, a company in which Joe Ricciardo and Tony Patrizi each hold non-controlling interests. The total amount invoiced to Optiro Pty Ltd in the year ended 30 June 2015 was $9,680 including GST (2014: Nil). The balance outstanding at 30 June 2015 is $9,680 (2014: Nil). During the year ended 30 June 2015 the consolidated entity provided engineering services and procurement of materials for Marindi Metals Limited (previously Brumby Resources Limited), a company in which Geoff Jones is a non-executive chairman. The total amount invoiced to Marindi Metals Limited in the year ended 30 June 2015 was $56,562 including GST (2014: Nil). The balance outstanding at 30 June 2015 is Nil (2014: Nil). During the year ended 30 June 2015 the consolidated entity provided engineering services and procurement of materials for Dacian Gold Limited, a company in Barry Patterson is a non-executive director. The total amount invoiced to Dacian Gold Limited in the year ended 30 June 2015 was $7,420 including GST (2014: Nil). The balance outstanding at 30 June 2015 is Nil (2014: Nil). The terms and conditions of the transactions and the associated agreements to which they relate (where applicable) that have been set out above are at arms length and on normal commercial terms. This marks the end of the remuneration report. 20 DIRECTORS’ REPORTContinuedCORPORATE GOVERNANCE The Directors of the consolidated entity are committed to the highest standards of corporate governance in all elements of the business of the consolidated entity including internal control, ethics, risk functions, policies and internal and external audit. The consolidated entity’s Board of Directors has adopted a comprehensive corporate governance policy and manual based on ASX guidelines. The Board continually seeks to review and develop additional structures to be implemented as the consolidated entity’s activities develop in size, nature and scope. Please refer to the Corporate Governance Statement contained in this report. This directors’ report is signed in accordance with a resolution of directors made pursuant to Section 298(2) of the Corporations Act 2001. On behalf of the Directors Geoff Jones Managing Director 20 August 2015 GR ENGiNEERiNG SERvicES LimiTEd ANNUAL REPORT 2015 21 aUDitOR’S inDEPEnDEnCE DEClaRatiOn Deloitte Touche Tohmatsu ABN 74 490 121 060 Woodside Plaza Level 14 240 St Georges Terrace Perth WA 6000 GPO Box A46 Perth WA 6837 Australia Tel: +61 8 9365 7000 Fax: +61 8 9365 7001 www.deloitte.com.au 21 August 2015 The Board of Directors GR Engineering Services Limited 183 Great Eastern Highway BELMONT WA 6104 Dear Board Members GR Engineering Services Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of GR Engineering Services Limited. As lead audit partner for the audit of the financial statements of GR Engineering Services Limited for the financial year ended 30 June 2015, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Neil Smith Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 21 22 COnSOliDatED StatEmEnt OF PROFit OR lOSS anD OthER COmPREhEnSiVE inCOmE FOR THE YEAR ENdEd 30 JUNE 2015 REVENUE Other income EXPENSES Employee benefits expense Superannuation expense Depreciation and amortisation expense Workers compensation expense Equity based payments Finance costs Direct materials and subcontractor costs Accountancy & audit fees Marketing Bad debts Occupancy Administration Profit before income tax expense Income tax expense Profit after income tax expense for the year attributable to the owners of GR Engineering Services Limited Other comprehensive income for the year, net of income tax Items that may be reclassified subsequently to profit or loss: Fair value gain/(loss) on available for sale financial assets Exchange differences on translating foreign operations Other comprehensive income for the year, net of income tax Total comprehensive income for the year attributable to the owners of GR Engineering Services Limited Notes 5 6 7 7 7 10 8 22 consolidated 2015 $ 2014 $ 216,892,554 114,182,880 1,586,113 4,410,411 (46,482,886) (29,320,690) (4,218,975) (4,169,359) (324,568) (564,101) (58,869) (2,252,373) (1,639,164) (185,877) (759,823) (81,029) (137,893,008) (60,993,558) (286,932) (34,930) (13,745) (2,309,003) (4,926,384) (430,849) (62,017) (146,340) (1,951,214) (3,983,782) 17,195,907 16,786,575 (4,258,256) (2,622,989) 12,937,651 14,163,586 346,848 1,103,967 1,450,815 (142,852) (414,488) (557,340) 14,388,466 13,606,246 Profit attributable to owners of the parent 12,937,651 14,163,586 Total comprehensive income attributable to the owners of the parent 14,388,466 13,606,246 Basic earnings per share Diluted earnings per share The accompanying notes form part of these Financial Statements. 32 32 cents 8.60 8.42 cents 9.44 9.26 23 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015COnSOliDatED StatEmEnt OF FinanCial POSitiOn AS AT 30 JUNE 2015 ASSETS current assets Cash and cash equivalents Trade and other receivables Inventories Other Total current assets Non-current assets Trade and other receivables Property, plant and equipment Financial assets Intangible assets Deferred tax Total non-current assets Total assets LIABILITIES current liabilities Trade and other payables Borrowings Income tax Provisions Unearned revenue Total current liabilities Non-current liabilities Borrowings Provisions Total non-current liabilities Total liabilities Net assets EqUITY Issued capital Reserves Retained profits Total equity Notes consolidated 2015 $ 2014 $ 9 10 11 12 10 13 14 15 8 16 17 8 18 19 17 18 20 21 22 64,582,994 32,193,955 26,038,936 34,674,786 2,821,512 2,355,304 652,458 738,393 94,095,900 69,962,438 – 3,514,591 2,347,202 3,891,099 2,040,901 601,704 552,656 3,647,664 2,256,138 8,670,587 546,612 10,727,980 102,766,487 80,690,418 35,392,357 21,609,153 397,912 2,055,333 7,962,338 5,416,190 287,966 1,889,743 4,873,459 3,818,279 51,224,130 32,478,600 706,432 2,111,213 2,817,645 247,412 1,407,585 1,654,997 54,041,775 34,133,597 48,724,712 46,556,821 28,918,256 28,785,355 2,552,945 670,930 17,253,511 17,100,536 48,724,712 46,556,821 The accompanying notes form part of these Financial Statements. 24 COnSOliDatED StatEmEnt OF CaSh FlOWS FOR THE YEAR ENdEd 30 JUNE 2015 cash flows from operating activities Receipts from customers Payments to suppliers and employees Income tax paid Interest received Notes consolidated 2015 $ 2014 $ 231,649,234 114,143,457 (184,485,238) (93,543,588) (5,802,192) 1,117,263 (3,070,409) 1,264,723 Net cash flows from operating activities 9 42,479,067 18,794,183 cash flows from investing activities Purchase of property, plant and equipment (1,797,266) (43,946) (Investment)/divestment in term deposits for project security 5,239,431 13,026,944 Net cash outflow on acquisition of business Investment in financial assets Net cash flows used in investing activities cash flows from financing activities Payment of finance lease liabilities Dividends paid Net cash flows used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Effects of exchange rate changes of balances of cash held in foreign currencies – (5,750,000) (1,398,649) 2,043,516 (56,804) 7,176,194 (168,525) (12,784,676) (12,953,201) (358,129) (9,000,000) (9,358,129) 31,569,382 16,612,248 32,193,955 16,218,685 819,657 (636,978) cash and cash equivalents at end of period 9 64,582,994 32,193,955 The accompanying notes form part of these Financial Statements. 25 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015COnSOliDatED StatEmEnt OF ChanGES in EQUitY FOR THE YEAR ENdEd 30 JUNE 2015 $ l a t o T $ i d e n a t e R i s g n n r a E , 2 5 7 0 9 1 1 4 , , 0 5 9 6 3 9 1 1 , , 6 8 5 3 6 1 4 1 , , 6 8 5 3 6 1 4 1 , $ – – e v r e s e R t n e m t s e v n i n o i t a u a v e R l – $ 3 3 2 , 0 1 n g i e r o F y c n e r r u c e v r e s e R n o i t a l s n a r T ) 0 4 3 7 5 5 , ( – ) 2 5 8 2 4 1 , ( ) 8 8 4 , 4 1 4 ( , 6 4 2 6 0 6 3 1 , , 6 8 5 3 6 1 4 1 , ) 2 5 8 2 4 1 , ( ) 8 8 4 , 4 1 4 ( – 3 2 8 9 5 7 , – – ) , 0 0 0 0 0 0 9 , ( ) , 0 0 0 0 0 0 9 , ( – – – – – – , 1 2 8 6 5 5 6 4 , , 1 5 6 7 3 9 2 1 , , 5 1 8 0 5 4 1 , , 6 6 4 8 8 3 4 1 , , 6 3 5 0 0 1 7 1 , ) 2 5 8 2 4 1 , ( ) 5 5 2 , 4 0 4 ( , 1 5 6 7 3 9 2 1 , – – – 8 4 8 6 4 3 , 7 6 9 , 3 0 1 , 1 , 1 5 6 7 3 9 2 1 , 8 4 8 6 4 3 , 7 6 9 , 3 0 1 , 1 – 1 0 1 4 6 5 , – – ) 6 7 6 4 8 7 , , 2 1 ( ) 6 7 6 4 8 7 , , 2 1 ( – – – – – – , 2 1 7 4 2 7 8 4 , , 1 1 5 3 5 2 7 1 , 6 9 9 3 0 2 , 2 1 7 , 9 9 6 $ – – – – – s t h g R i e v r e s e R ) 7 0 8 , 3 8 2 ( 8 9 0 , 6 6 3 1 9 2 , 2 8 – – – – ) 1 0 9 , 2 3 1 ( 8 8 5 , 0 3 1 8 7 9 , 9 7 e r a h S n o i t a i c e r p p A e c n a m r o f r e P $ s t h g R i e v r e s e R $ e r a h S n o i t p O e v r e s e R $ d e u s s i l a t i p a c 26 5 2 4 , 3 9 2 6 9 5 , 8 4 4 8 4 5 1 0 5 , , 8 2 3 1 0 2 e n u J 0 3 t a s a e c n a l a B – – – – – – – – – – 1 2 8 , 6 9 2 6 4 2 , 0 9 5 4 0 9 , 6 9 0 0 5 , 5 4 5 – – – – – – – – – – 6 1 5 , 4 9 3 2 6 7 , 4 8 9 7 9 9 , 8 3 7 9 4 , 4 8 5 . s t n e m e t a t S – 7 0 8 3 8 2 , s t n e m y a p d e s a b e r a h S s e r a h s f o e u s s I 5 5 3 5 8 7 , , 8 2 4 1 0 2 e n u J 0 3 t a s a e c n a l a B – – – – i e v s n e h e r p m o c r e h t O d o i r e p e h t r o f e m o c n i i e v s n e h e r p m o c l a t o T d o i r e p e h t r o f e m o c n i d o i r e p e h t r o f t fi o r P s d n e d v D i i – 1 0 9 2 3 1 , s t n e m y a p d e s a b e r a h S s e r a h s f o e u s s I 6 5 2 8 1 9 , , 8 2 5 1 0 2 e n u J 0 3 t a s a e c n a l a B l i i a c n a n F e s e h t f o t r a p m r o f s e t o n i g n y n a p m o c c a e h T – – – – i e v s n e h e r p m o c r e h t O d o i r e p e h t r o f e m o c n i i e v s n e h e r p m o c l a t o T d o i r e p e h t r o f e m o c n i d o i r e p e h t r o f t fi o r P s d n e d v D i i nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 NOTE 1. GENERAL INFORMATION The financial report covers GR Engineering Services Limited as a consolidated entity consisting of GR Engineering Services Limited and the entities it controlled during the year. The financial report is presented in Australian dollars, which is GR Engineering Services Limited’s functional and presentation currency. The financial report consists of the Financial Statements, Notes to the Financial Statements and the Directors’ Declaration. GR Engineering Services Limited is a listed public company limited by shares, incorporated and domiciled in Australia. The registered office of GR Engineering Services Limited is located at 179 Great Eastern Highway, Belmont, Western Australia. The principal place of business is located at 179 Great Eastern Highway, Belmont, Western Australia. A description of the nature of the consolidated entity’s operations and its principal activities are included in the directors’ report, which is not part of the financial report. The financial report was authorised for issue, in accordance with a resolution of directors, on 20 August 2015. The directors have the power to amend and reissue the financial report. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New, revised or amending Accounting Standards and Interpretations adopted Adoption of new and revised Accounting Standards The consolidated entity has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board that are relevant to their operations and are effective for the current financial reporting period, beginning 1 July 2014. New and revised Standards and amendments thereof and Interpretations effective for the current year that are relevant to the consolidated entity included: • AASB 1031 ‘Materiality’ (December 2013) • AASB 2012-3 ‘Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities (Amendments to AASB 132)’ • AASB 2013-3 ‘Amendments to AASB 136 – Recoverable Amount Disclosures for Non-Financial Assets’ • AASB 2013-4 ‘Amendments to Australian Accounting Standards – Novation of Derivatives and Continuation of Hedge Accounting’ • AASB 2013-5 ‘Amendments to Australian Accounting Standards – Investment Entities’ • AASB 2013-9 ‘Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments – Part B’ • AASB 2014-1 ‘Amendments to Australian Accounting Standards’ [Part A – Annual Improvements 2010-2012 and 2011-2013 Cycles] • AASB 2014-1 ‘Amendments to Australian Accounting Standards’ [Part C – Materiality] • Interpretation 21 ‘Levies’ The adoption of these standards and interpretations did not have a material impact on the consolidated entity. Any new, revised or amending Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. 27 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued) New Accounting Standards and Interpretations not yet mandatory or early adopted The following Australian Accounting Standards and Interpretations have recently been issued or amended but are not yet effective and have not been adopted by the consolidated entity for the year ended 30 June 2015. Standard/interpretation Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending AASB 9 ‘Financial Instruments’, and the relevant amending standards 1 January 2018 30 June 2019 AASB 15 ‘Revenue from Contracts with Customers’ and AASB 2014-5 ‘Amendments to Australian Accounting Standards arising from AASB 15’ 1 January 2017 30 June 2018 AASB 2014-3 ‘Amendments to Australian Accounting Standards – Accounting for Acquisitions of Interests in Joint Operations’ AASB 2014-4 ‘Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation’ AASB 2014-9 ‘Amendments to Australian Accounting Standards – Equity Method in Separate Financial Statements’ AASB 2014-10 ‘Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture’ 1 January 2016 30 June 2017 1 January 2016 30 June 2017 1 January 2016 30 June 2017 1 January 2016 30 June 2017 AASB 2015-1 ‘Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012-2014 Cycle’ 1 January 2016 30 June 2017 AASB 2015-2 ‘Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101’ 1 January 2016 30 June 2017 AASB 2015-3 ‘Amendments to Australian Accounting Standards arising from the Withdrawal of AASB 1031 Materiality’ 1 July 2015 30 June 2016 AASB 2015-4 ‘Amendments to Australian Accounting Standards – Financial Reporting Requirements for Australian Groups with a Foreign Parent’ 1 July 2015 30 June 2016 AASB 2015-5 ‘Amendments to Australian Accounting Standards – Investment Entities: Applying the Consolidation Exception’ 1 July 2015 30 June 2016 The impact of these recently issued or amended standards and interpretations have not been determined as yet by the consolidated entity. Statement of compliance These financial statements are general purpose financial statements which have been prepared in accordance with the Corporations Act 2001, Accounting Standards and Interpretations, and comply with other requirements of the law. The financial statements comprise the consolidated financial statements of the consolidated entity. For the purposes of preparing the consolidated financial statements, the consolidated entity is a for-profit entity. Accounting Standards include Australian Accounting Standards. Compliance with Australian Accounting Standards ensures that the financial statements and notes of the company and the consolidated entity comply with International Financial Reporting Standards (‘IFRS’). 28 Basis of preparation Historical cost convention The consolidated financial statements have been prepared on the basis of historical cost, except for certain non-current assets and financial instruments that are measured at revalued amounts or fair values, as explained in the accounting policies below. Historical cost is generally based on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian dollars, unless otherwise noted. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the consolidated entity takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of AASB 2, leasing transactions that are within the scope of AASB 117, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in AASB 2 or value in use in AASB 136. In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; • Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and • Level 3 inputs are unobservable inputs for the asset or liability. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated entity’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 3. Accounting for construction contracts Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the reporting date, measured based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer. Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred that it is probable will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. Where construction contracts are still in the completion stage, they are included as work in progress. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. 29 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Principles of consolidation The consolidated financial statements incorporate the financial statements of the consolidated entity and entities (including structured entities) controlled by the consolidated entity and its subsidiaries. Control is achieved when the consolidated entity: • has power over the investee; • is exposed, or has rights, to variable returns from its involvement with the investee; and • has the ability to use its power to affect its returns. The consolidated entity reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the consolidated entity has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The consolidated entity considers all relevant facts and circumstances in assessing whether or not the consolidated entity’s voting rights in an investee are sufficient to give it power, including: • the size of the consolidated entity’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; • potential voting rights held by the consolidated entity, other vote holders or other parties; • rights arising from other contractual arrangements; and • any additional facts and circumstances that indicate that the consolidated entity has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. Consolidation of a subsidiary begins when the consolidated entity obtains control over the subsidiary and ceases when the consolidated entity loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the consolidated entity gains control until the date when the consolidated entity ceases to control the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the owners of the consolidated entity and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the consolidated entity and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. Operating segments Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Managing Director of the consolidated entity. 30 Foreign currency translation The financial report is presented in Australian dollars, which is GR Engineering Services Limited’s functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The functional currency of GR Engineering Services (UK) Limited is Great British pounds. The functional currency of Upstream Production Solutions Malaysia Sdn. Bhd. is Malaysian Ringgit. The functional currency of other foreign subsidiaries of the consolidated entity is United States dollars. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the consolidated entity and the revenue can be reliably measured. Sales revenue Revenue from the sale of goods is recognised when the consolidated entity has transferred to the buyer the significant risks and rewards of ownership of the goods. Rendering of services Revenue from a contract to provide services is recognised by reference to the stage of completion. Where the contract outcome cannot be measured reliably, revenue is recognised only to the extent of the expenses recognised that are recoverable. Interest Revenue is recognised as the interest accrues (using the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument) to the net carrying amount of the financial asset. 31 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Income tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the statement of profit or loss because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The consolidated entity’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred income tax is provided for on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for the financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences: • except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and • in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised: • except where the deferred income tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and • in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the statement of profit or loss and other comprehensive income. Unearned income Unearned income classified as a current liability consists of customer advances for construction work in progress. The consolidated entity recognises a liability upon receipt of customer advances and then subsequently recognised as revenue when earned. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short- term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Trade and other receivables Trade receivables, which generally have 30-90 day terms, are recognised and carried at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified. 32 Inventories Inventories are valued at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Investments and other financial assets Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. They are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on the purpose of the acquisition and subsequent reclassification to other categories is restricted. The fair values of quoted investments are based on current bid prices. For unlisted investments, the consolidated entity establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the consolidated entity has transferred substantially all the risks and rewards of ownership. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are carried at amortised cost using the effective interest rate method. Gains and losses are recognised in profit or loss when the asset is derecognised or impaired. Available for sale financial assets Listed shares and listed redeemable notes held by the consolidated entity that are traded in an active market are classified as available for sale and are stated at fair value. Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in the investments revaluation reserve, with the exception of impairment losses, interest calculated using the effective interest method, and foreign exchange gains and losses on monetary assets, which are recognised in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss. Dividends on available for sale equity instruments are recognised in profit or loss when the consolidated entity’s right to receive the dividends is established. Impairment of financial assets The consolidated entity assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. Objective evidence includes significant financial difficulty of the issuer or obligor; a breach of contract such as default or delinquency in payments; the lender granting to a borrower concessions due to economic or legal reasons that the lender would not otherwise do; it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for the financial asset; or observable data indicating that there is a measurable decrease in estimated future cash flows. When an available for sale financial asset is considered to be impaired, cumulative gains or losses previously recognised in other comprehensive income are reclassified to profit or loss in the period. The amount of the impairment allowance for loans and receivables carried at amortised cost is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. If there is a reversal of impairment, the reversal cannot exceed the amortised cost that would have been recognised had the impairment not been made and is reversed to profit or loss. 33 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Property, plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows: • Property, plant and equipment – over 2.5 to 20 years The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash- generating unit to which the asset belongs. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. The recoverable amount of plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognised in the profit or loss in the cost of sales line item. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued used of the asset. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the statement of profit or loss in the period the item is derecognised. Leases Finance leases, which transfer to the consolidated entity substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same bases as the lease income. Operating lease payments are recognised as an expense in the statement of profit or loss on a straight-line basis over the lease term. Impairment of non-financial assets At each reporting date, the consolidated entity assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the consolidated entity makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. 34 Trade and other payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Borrowings All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the profit or loss when the liabilities are derecognised as well as through the amortisation process. Provisions Provisions are recognised when the consolidated entity has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the consolidated entity expects some or all of a provision to be reimbursed the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of profit or loss net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Employee benefits Wages and salaries, annual leave and sick leave A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and sick leave in the period the related service is rendered. Liabilities recognised in respect of short-term employee benefits, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of long term employee benefits are measured as the present value of the estimated future cash outflows to be made by the consolidated entity in respect of services provided by employees up to reporting date. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments Share based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. The fair value determined at the grant date of the share based payments is expensed on a straight-line basis over the vesting period, based on the consolidated entity’s estimate of equity instruments that will eventually vest. At the end of each reporting period, the consolidated entity revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the equity-settled employee benefits reserve. Share based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service. 35 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares for the acquisition of a business are not included in the cost of the acquisition as part of the purchase consideration. If the entity reacquires its own equity instruments, for example as the result of a share buy back, those instruments are deducted from equity and the associated shares are cancelled. No gain or loss is recognised in profit or loss and the consideration paid including any directly attributable incremental costs (net of income taxes) is recognised directly in equity. Dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the company. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of GR Engineering Services Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. De-recognition of financial instruments The de-recognition of a financial instrument takes place when the consolidated entity no longer controls the contractual rights that comprise the financial instrument, which is normally the case when the instrument is sold, or all the cash flows attributable to the instrument are passed through to an independent third party. Goods and Services Tax (‘GST’) and other similar taxes Revenues, expenses and assets are recognised net of the amount of GST except where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. 36 Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value which is calculated as the sum of the acquisition-date fair values of assets transferred by the consolidated entity, liabilities incurred by the consolidated entity to the former owners of the acquire and the equity instruments issued by the consolidated entity in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that: • deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with AASB 112 ‘Income Taxes’ and AASB 119 ‘Employee Benefits’ respectively; • liabilities or equity instruments related to share-based payment arrangements of the acquiree or share- based payment arrangements of the consolidated entity entered into to replace share-based payment arrangements of the acquire are measured in accordance with AASB 2 ‘Share-based Payment’ at the acquisition date; and • assets (or disposal groups) that are classified as held for sale in accordance with AASB 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ are measured in accordance with that Standard. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non- controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non- controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. Intangible assets Intangible assets acquired in a business combination Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight- line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. GR ENGiNEERiNG SERvicES LimiTEd ANNUAL REPORT 2015 37 nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 3. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the reporting date, measured based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer. Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred that it is probable will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. Where construction contracts are still in the completion stage, they are included as work in progress. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. Because the consolidated entity predominantly undertakes projects on an Engineering, Procurement & Construction (“EPC”) turnkey design and construction contract basis, all the risk associated with cost, time, plant performance and plant warranty (defects period) rests with the consolidated entity. As such the consolidated entity is responsible for the total “make-good” of any defects of underperformance. The consolidated entity includes a project completion and close out provision (liability) in design and construction project cost forecast reports, nominally being 3% of the project costs. This percentage has been assessed based on management’s best estimate. NOTE 4. OPERATING SEGMENTS Operating segments have been identified on the basis of internal reports of the consolidated entity that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segments and to assess their performance. The chief operating decision maker has been identified as the Managing Director. On a regular basis, the board receives financial information on a company basis similar to the financial statements presented in the financial report, to manage and allocate their resources. The Managing Director has chosen to classify the operations of the consolidated entity by reference to presence in an industry. The segments identified on this basis are “mineral processing” and “oil and gas”. Segment revenues and results The following table shows the revenue and results of the consolidated entity summarised under these segments. Segment revenue Mineral processing Oil and gas Total revenue Segment profit before tax Mineral processing Oil and gas Total profit before tax 2015 $ 2014 $ 185,668,102 109,945,226 31,224,452 4,237,654 216,892,554 114,182,880 18,815,506 14,353,376 (1,619,599) 2,433,199 17,195,907 16,786,575 Segment revenue reported above represents revenue generated from external customers. There were no inter-segment sales in the current year (2014: Nil). 38 Segment assets and liabilities Segment assets Mineral processing Oil and gas Total assets depreciation and amortisation Mineral processing Oil and gas Total depreciation and amortisation Segment liabilities Mineral processing Oil and gas Total liabilities Geographical information 2015 $ 2014 $ 88,416,047 67,084,984 14,350,441 13,605,434 102,766,487 80,690,418 701,436 1,009,408 3,467,923 4,169,359 629,756 1,639,164 48,870,511 29,541,239 5,171,264 4,592,358 54,041,775 34,133,597 The following table shows the revenue from external customers of the consolidated entity summarised by location. Revenue Australia Overseas Total revenue Non-current assets 102,836,821 46,871,453 114,055,733 67,311,427 216,892,554 114,182,880 All non-current assets of the consolidated entity are held in Australia. Information about major customers During the financial year two customers individually provided more than 10% of total revenue each for the consolidated entity. 39 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 5. REVENUE Rendering of services – construction contracts 185,668,102 109,945,226 Rendering of services – operations and maintenance contracts 31,224,452 4,237,654 Total revenue 216,892,554 114,182,880 consolidated 2015 $ 2014 $ NOTE 6. OTHER INCOME Net foreign exchange gain/(loss) Net gain/(loss) on disposal of property, plant and equipment Subsidies and grants Interest revenue Gain on bargain purchase of business Other revenue Other income NOTE 7. EXPENSES 436,480 13,284 10,056 1,117,263 – 9,030 143,706 (21,183) 495 1,264,723 3,035,549 (12,879) 1,586,113 4,410,411 Profit before income tax includes the following specific expenses: Finance costs Interest and leasing charges on finance leases 58,869 81,029 Employee benefits Employee benefits expense excluding superannuation Defined contribution superannuation expense Total employee benefits 46,482,886 29,320,690 4,218,975 2,252,373 50,701,861 31,573,064 40 NOTE 8. INCOME TAX EXPENSE Major components of income tax expense for the years ended 30 June 2015 and 2014 are: income tax recognised in the consolidated statement of profit or loss Current income tax Current income tax charge Adjustments in respect of current income tax of previous years consolidated 2015 $ 2014 $ 6,894,707 (778,276) 5,215,891 (2,503,708) Deferred income tax Relating to origination and reversal of temporary differences Adjustments in respect of previous deferred income tax (1,818,250) (39,925) (767,821) 678,627 Income tax expense reported in statement of profit or loss 4,258,256 2,622,989 income tax recognised in statement of changes in equity Deferred income tax Revaluation of shares Income tax expense reported in equity A reconciliation of income tax expense applicable to accounting profit before income tax at the statutory income tax rate to income tax expense at the consolidated entity’s effective income tax rate for the years ended 30 June 2015 and 2014 is as follows: (148,649) (148,649) 61,222 61,222 Accounting profit before income tax At the statutory income tax rate of 30% (2014: 30%) 17,195,907 16,786,575 5,158,772 5,035,973 Add: Non-deductible expenses Foreign tax on projects 194,444 – (610,670) 22,767 Adjustments in respect of previous current income tax (818,201) (1,890,726) Derecognition of prior year overseas losses Impact to tax expense arising from foreign tax rate differential At effective income tax rate of 24.8% (2014: 15.6%) – (276,759) 4,258,256 65,645 – 2,622,989 Income tax expense reported in statement of profit or loss 4,258,256 2,622,989 41 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 8. INCOME TAX EXPENSE (continued) deferred income tax Deferred income tax at 30 June relates to the following: Deferred income tax assets Accrued employee entitlements Accrued superannuation Accrued audit fees Leasing Section 40/880 deduction Provision for long service leave Provision for warranty Unrealised foreign exchange (gain)/loss Lease termination Payables – Upstream Production Solutions subsidiary Accrued employee entitlements – Upstream Production Solutions subsidiary Shares in listed entity Deferred income tax liabilities Prepayments Accrued interest Other accrued income Unrealised foreign exchange gain Assets capitalised for tax Net trade debtors – Upstream Production Solutions subsidiary Prepayments – Upstream Production Solutions subsidiary Customer contracts – Upstream Production Solutions subsidiary Plant and equipment – Upstream Production Solutions subsidiary consolidated 2015 $ 2014 $ 63,505 14,073 17,026 (6,027) 2,277 93,181 1,534,549 – 61,452 94,806 674,208 (87,427) 40,993 16,079 19,500 (43,585) 133,001 64,654 804,968 10,125 9,965 94,806 547,490 61,222 2,461,623 1,759,218 (2,434) (17,173) (2,498) (779) (1,554) – (222) (165,797) (15,028) (205,485) (3,577) (20,426) (8) – (720) (72,906) (634) (1,094,298) (20,037) (1,212,606) Net deferred tax asset 2,256,138 546,612 current tax assets and liabilities Current tax liabilities Income tax payable 2,055,333 1,889,743 42 NOTE 9. CURRENT ASSETS – CASH AND CASH EqUIVALENTS Cash on hand Cash at bank Cash on deposit The fair value of cash and cash equivalents is $64,582,994 (2014: $32,193,955). Cash at bank and in hand earns interest at floating rates based on daily bank rates. Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the consolidated entity, and earn interest at the respective short-term deposit rates. In previous periods the consolidated entity has held term deposits to secure bank guarantees for current projects. The agreement with National Australia Bank does not require this balance to be held in term deposit any longer. The balance as at 30 June 2015 is Nil (2014: $5,239,431). This balance was included in trade and other receivables in previous periods. A summary of all cash including term deposits is as follows: Cash at bank and on hand Cash on deposit (Current asset) Term deposits held for project security (Current asset) Term deposits held for project security (Non-current asset) Reconciliation of cash For the purposes of the Statement of Cash Flows, cash and cash equivalents comprise the following at 30 June: Cash at bank and on hand Cash on deposit consolidated 2015 $ 120,814 2014 $ 42,129 40,489,539 12,651,826 23,972,641 19,500,000 64,582,994 32,193,955 40,610,353 12,693,955 23,972,641 19,500,000 – – 1,348,332 3,891,099 64,582,994 37,433,386 40,610,353 12,693,955 23,972,641 19,500,000 64,582,994 32,193,955 43 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 9. CURRENT ASSETS – CASH AND CASH EqUIVALENTS (continued) Reconciliation from the net profit after tax to the net cash flow from operations Net profit after tax Non-cash items Depreciation and amortisation Profit/loss on sale of asset Share based employee payments Net foreign exchange (gain)/loss Gain on bargain purchase of business Acquisition of shares as consideration for services Changes in assets and liabilities consolidated 2015 $ 2014 $ 12,937,651 14,163,586 4,169,359 1,639,164 (13,284) 564,101 284,308 – – 21,183 759,823 222,490 (3,035,549) (748,974) (Increase)/decrease in trade and other receivables 7,373,451 (3,087,761) (Increase)/decrease in inventories (Increase)/decrease in deferred tax asset (Decrease)/increase in trade and other payables (Decrease)/increase in provisions (Decrease)/increase in tax liabilities Increase in unearned income (466,000) (1,709,527) 4,545 (89,195) 13,777,824 15,494,222 3,797,890 165,591 855,255 (358,226) 1,597,703 (7,046,380) Net cash from operating activities 42,479,067 18,794,183 NON-CASH TRANSACTIONS During the year ended 30 June 2015 and year ending 30 June 2014, the following non-cash investing and financing activities occurred, which are not reflected in the consolidated statement of cash flows: • during the year ended 30 June 2015 the consolidated entity acquired equipment under finance lease of $812,348 (2014: $nil) 44 NOTE 10. TRADE AND OTHER RECEIVABLES current assets – trade and other receivables Trade receivables Less: Allowance for impairment of receivables Term deposits held for project security* Other receivables Accrued revenue Non-current assets – trade and other receivables Term deposits held for project security* * In previous periods the consolidated entity has held term deposits to secure bank guarantees for current projects. In May 2015 the consolidated entity entered into a revised agreement with National Australia Bank, which removed the requirement for these term deposits to be held. These balances were classified as other receivables, they are now classified as cash. The balance of these other receivables in current assets at 30 June 2015 is Nil (2014: $1,348,332), the balance in non-current assets at 30 June 2015 is Nil (2014: $3,891,099). A summary of term deposits held for project security is as follows: Term deposits held for project security (Current asset) Term deposits held for project security (Non-current asset) Impairment of receivables Movements in the allowance for impairment of receivables are as follows: Opening balance Receivables written off during the year as uncollectable Closing balance Bad debts written off during the year as uncollectable amount to $13,745 (2014: $146,340). Past due but not impaired Customers with balances past due but without allowance for impairment of receivables amount to $2,593,631 as at 30 June 2015 ($1,290,828 as at 30 June 2014). consolidated 2015 $ 2014 $ 25,909,381 33,250,872 – – 25,909,381 33,250,872 – 1,348,332 81,784 47,771 25,266 50,316 26,038,936 34,674,786 – 3,891,099 – – – – – – 1,348,332 3,891,099 5,239,431 – – – 45 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 10. TRADE AND OTHER RECEIVABLES (continued) The ageing of the past due but not impaired receivables are as follows: 0 to 3 months overdue 3 to 6 months overdue Over 6 months overdue In determining the recoverability of a trade receivable, the consolidated entity considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the end of the reporting period. The concentration of credit risk is limited due to the fact that the customer base is large and unrelated. NOTE 11. CURRENT ASSETS – INVENTORIES Consumables – at cost Work in progress consolidated 2015 $ 2,576,343 17,288 – 2014 $ 836,366 454,462 – 2,593,631 1,290,828 643,800 2,177,712 2,821,512 643,800 1,711,504 2,355,304 NOTE 12. NOTE 12. CURRENT ASSETS – OTHER Prepayments 652,458 738,393 NOTE 13. NON-CURRENT ASSETS – PROPERTY, PLANT AND EqUIPMENT Plant and equipment – at cost Less: Accumulated depreciation Plant and equipment under lease Less: Accumulated depreciation 6,876,508 (3,776,287) 3,100,221 2,096,878 (1,682,508) 414,370 4,263,196 (2,902,953) 1,360,243 2,171,734 (1,491,076) 680,658 3,514,591 2,040,901 46 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Plant & Equipment Under Lease $ Plant & Equipment $ Total $ 1,089,297 1,582,655 2,671,952 – – (73,413) 2,351 (337,577) 680,658 812,348 – – 86,696 400,000 (5,400) (2,351) 86,696 400,000 (78,813) – (701,357) (1,038,935) 1,360,243 1,780,891 (45,197) – 2,040,901 2,593,239 (45,197) – (267,666) (806,685) (1,074,351) 1,225,340 2,289,252 3,514,591 Balance at 1 July 2013 Additions Transferred on acquisition of business Disposals, Write off of assets Transfers in/(out) Depreciation expense Balance at 30 June 2014 Additions Disposals, Write off of assets Transfers in/(out) Depreciation expense Balance at 30 June 2015 NOTE 14. FINANCIAL ASSETS Available for sale financial assets held at fair value Shares in listed entities consolidated 2015 $ 2014 $ 2,347,202 601,704 Shares held in the listed entity Doray Minerals Limited are measured at fair value at the end of the reporting period. The number of shares held at 30 June 2015 is 2,436,048 (30 June 2014: Nil). All ordinary shares held in Mutiny Gold Limited were transferred into ordinary shares in Doray Minerals Limited on 22 January 2015. The number of shares held in Mutiny Gold Limited at 30 June 2015 is Nil (30 June 2014: 23,142,464). Shares held in the listed entity Kibaran Resources Limited are measured at fair value at the end of the reporting period. The number of shares held at 30 June 2015 is 1,470,588 (30 June 2014: Nil). Shares held in the listed entity Cassini Resources Limited are measured at fair value at the end of the reporting period. The number of shares held at 30 June 2015 is 14,925,380 (30 June 2014: Nil). NOTE 15. INTANGIBLE ASSETS Customer contracts acquired on purchase of business Less: Accumulated amortisation Total intangible assets consolidated 2015 $ 4,247,863 (3,695,207) 2014 $ 4,247,863 (600,199) 552,656 3,647,664 The acquisition of the business of Upstream Production Solutions included seven projects in place at the acquisition date 23 April 2014. The fair value of each contract is amortised over the life of that contract. The lives of the seven contracts range between 2 and 4 years. 47 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 16. CURRENT LIABILITIES – TRADE AND OTHER PAYABLES Trade payables Accrued expenses GST payable Other payables consolidated 2015 $ 22,435,808 9,494,986 517,076 2,944,487 2014 $ 8,930,874 7,861,469 2,912,194 1,904,616 35,392,357 21,609,153 Refer to Note 24 for further information on financial instruments. Trade payables are non-interest bearing and are normally settled on 30 day terms. The net of GST payable and GST receivable is remitted to the appropriate tax body on a monthly basis. NOTE 17. BORROWINGS current liabilities – borrowings Lease liability Non-current liabilities – borrowings Lease liability Refer to Note 24 for further information on financial instruments. Total secured liabilities The total secured liabilities (current and non-current) are as follows: 397,912 287,966 706,432 247,412 Lease liability Assets pledged as security 1,104,344 535,378 The lease liabilities are effectively secured as the rights to the leased assets, recognised in the statement of financial position, revert to the lessor in the event of default. 48 NOTE 18. PROVISIONS current liabilities – provisions Annual leave Warranties Project returns movement in provisions Provision for annual leave Balance at beginning of year Additional provisions recognised Amounts used Balance at end of year Provision for warranty and defects liability Balance at beginning of year Additional provisions/(reduction in provisions) recognised Amounts used Balance at end of year Provision for project returns Balance at beginning of year Additional provisions/(reduction in provisions) recognised Amounts used Balance at end of year Non-current liabilities – provisions Long service leave movement in provisions Provision for long service leave Balance at beginning of year Additional provisions recognised Amounts used Balance at end of year consolidated 2015 $ 2014 $ 2,847,178 5,115,160 – 2,190,232 2,683,227 – 7,962,338 4,873,459 2,190,232 2,816,751 1,156,934 2,359,555 (2,159,805) (1,326,257) 2,847,178 2,190,232 2,683,227 2,431,933 – 1,942,275 952,652 (211,700) 5,115,160 2,683,227 – – – – 96,034 – (96,034) – 2,111,213 1,407,585 1,407,585 757,204 (53,575) 661,861 788,472 (42,748) 2,111,213 1,407,585 49 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 19. CURRENT LIABILITIES – UNEARNED REVENUE Unearned revenue contracts in progress Progress billings Construction costs to date plus recognised profits NOTE 20. EqUITY – ISSUED CAPITAL consolidated 2015 $ 2014 $ 5,416,190 3,818,279 216,482,839 144,540,271 211,066,649 140,721,992 5,416,190 3,818,279 consolidated consolidated 2015 Shares 2014 Shares 2015 $ 2014 $ Ordinary shares – fully paid Opening balance 150,407,949 150,000,000 28,785,355 28,501,548 Additional shares issued 324,582 407,949 132,901 283,807 Ordinary shares – fully paid 150,732,531 150,407,949 28,918,256 28,785,355 Ordinary shares Fully paid ordinary shares carry one vote per share and carry a right to dividends. Changes to the Corporation Law abolished the authorised capital and par value concept in relation to share capital from 1 July 1998. Therefore, the consolidated entity does not have a limited amount of authorised capital and issued shares do not have a par value. Share appreciation rights As at 30 June 2015, the consolidated entity had issued a total of 942,064 share appreciation rights to Geoff Jones, Managing Director, as part of the consolidated entity’s equity incentive plan (as at 30 June 2014: 1,669,337). Number of shares under share appreciation rights 432,433 296,297 213,334 Grant date vesting date Exercise price 12/11/13 12/11/13 12/11/13 30/06/16 30/06/17 30/06/18 $0.50 $0.50 $0.50 Performance condition share price targets $0.86 $1.04 $1.24 50 Performance rights As at 30 June 2015, the consolidated entity had issued a total of 2,295,000 performance rights (as at 30 June 2014: 2,315,000): Number of performance rights Grant date Expiry date Exercise price 1,710,000 25,000 50,000 127,500 127,500 127,500 127,500 NOTE 21. EqUITY – RESERVES Foreign currency reserve Performance rights reserve Share options reserve Share appreciation rights reserve Investment revaluation reserve Foreign currency reserve Balance at beginning of year Additional amounts recognised Balance at end of year 11/09/12 4/10/12 13/05/13 30/04/14 30/04/14 30/04/14 30/04/14 21/09/15 4/10/15 13/05/16 31/03/16 31/03/17 31/03/18 31/03/19 consolidated 2015 $ 699,712 984,762 584,497 79,978 203,996 2,552,945 (404,255) 1,103,967 699,712 Nil Nil Nil Nil Nil Nil Nil 2014 $ (404,255) 590,246 545,500 82,291 (142,852) 670,930 10,233 (414,488) (404,255) The above foreign currency reserve represents foreign exchange differences resulting from translation of foreign currency amounts held in subsidiaries of the consolidated entity. Performance rights reserve Balance at beginning of year Additional amounts recognised Balance at end of year The above performance rights reserve relates to performance rights granted and vested by the consolidated entity to its employees under its equity incentive plan. 590,246 394,516 984,762 293,425 296,821 590,246 51 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 21. EqUITY – RESERVES (continued) Share options reserve Balance at beginning of year Additional amounts recognised Balance at end of year The above share options reserve relates to share options granted and vested by the consolidated entity to its employees under its employee share option plan. Share appreciation rights reserve Balance at beginning of year Additional amounts recognised Amount exercised Balance at end of year The above share appreciation rights reserve relates to share appreciation rights granted and vested by the consolidated entity to its employees under its equity incentive plan. Investment revaluation reserve Balance at beginning of year Additional amounts recognised Less tax effect of additional amount recognised Balance at end of year The above investment revaluation reserve relates to the revaluation of shares held in listed entities to fair value at the end of the reporting period. The fair value is determined using the quoted share price at 30 June 2015. NOTE 22. EqUITY – RETAINED PROFITS Retained profits at the beginning of the financial year Profit after income tax expense for the year Payment of dividends Retained profits at the end of the financial year consolidated 2015 $ 545,500 38,997 584,497 2014 $ 448,596 96,904 545,500 82,291 130,588 (132,901) 79,978 – 366,098 (283,807) 82,291 (142,852) 370,529 (23,681) 203,996 – (204,074) 61,222 (142,852) 17,100,536 11,936,950 12,937,651 14,163,586 (12,784,676) (9,000,000) 17,253,511 17,100,536 52 NOTE 23. EqUITY – DIVIDENDS Dividends Year ended 30 June 2014 Dividend paid 1 October 2013 (fully franked at 30% tax rate): 3 cents per ordinary share Dividend paid 28 March 2014 (franked to 40%): 3 cents per ordinary share Year ended 30 June 2015 Dividend paid 30 September 2014 (fully franked at 30% tax rate): 4 cents per ordinary share Dividend paid 30 March 2015 (fully franked at 30% tax rate): 4.5 cents per ordinary share On 20 August 2015, the consolidated entity declared a fully franked dividend of 5.0 cents per share, an aggregate of $7,536,627. The Record Date of the dividend is 11 September 2015 and the proposed payment date is 25 September 2015. consolidated 2015 $ 2014 $ 4,500,000 4,500,000 6,016,318 6,768,358 12,784,676 9,000,000 Franking credits Franking credits available for subsequent financial years based on a tax rate of 30% 1,219,526 1,696,720 NOTE 24. FINANCIAL INSTRUMENTS Financial risk management objectives The consolidated entity is exposed to risks in relation to its financial instruments. These risks include market risk (consisting of foreign currency risk and interest rate risk), credit risk, liquidity risk and equity risk. A summary of the consolidated entity’s financial instruments are as follows: Financial assets Cash and cash equivalents Trade and other receivables Available for sale securities Total financial assets Financial liabilities Trade and other payables Finance lease liabilities Total financial liabilities 64,582,994 32,193,955 26,038,936 38,565,885 2,347,202 601,704 92,969,132 71,361,544 35,392,357 21,609,153 1,104,344 535,378 36,496,701 22,144,531 53 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 24. FINANCIAL INSTRUMENTS (continued) Capital management The consolidated entity manages its capital to ensure the ability to continue as a going concern while maximising the return to stakeholders. The capital structure of the consolidated entity consists of equity in the form of issued capital, reserves and retained earnings. There is no requirement for borrowings at this stage, as there are sufficient reserves of cash balances. Market risk Foreign currency risk The consolidated entity and the parent entity undertakes certain transactions denominated in foreign currency and are exposed to foreign currency risk through foreign exchange rate fluctuations. The carrying amounts in Australian dollars (AUD) of the consolidated entity’s foreign currency denominated monetary assets and monetary liabilities at the end of the reporting period are as follows. United States Dollars Great British Pounds Indonesian Rupiah Malaysian Ringgit Assets Liabilities 2015 AUd $ 4,074,106 2014 AUd $ 153,001 2015 AUd $ (476,221) 18,570,958 3,447,343 (9,946,829) 5,588 61,209 – – (4,612) (24) 22,711,861 3,600,344 (10,427,686) 2014 AUd $ – – – – – Foreign exchange risk arises from future commercial transactions denominated in a currency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. The consolidated entity holds cash balances in United States dollars, these balances are translated into Australian dollars at the prevailing exchange rate at 30 June 2015 of AUD $1 = USD $0.77 (2014: AUD $1 = USD $0.94). The consolidated entity holds cash balances in Great British pounds, these balances are translated into Australian dollars at the prevailing exchange rate at 30 June 2015 of AUD $1 = GBP £0.49 (2014: AUD $1 = GBP £0.55). The consolidated entity holds cash balances in Indonesian rupiah, these balances are translated into Australian dollars at the prevailing exchange rate at 30 June 2015 of AUD $1 = IDR 10,207.20 (2014: AUD $1 = IDR 11,293.70). The consolidated entity holds cash balances in Malaysian ringgit, these balances are translated into Australian dollars at the prevailing exchange rate at 30 June 2015 of AUD $1 = MYR 2.8905 (2014: AUD $1 = MYR 3.024 54 The following table details the consolidated entity’s sensitivity to a 10% increase and decrease in the value of the Australian dollar against the currencies in which monetary assets are held: Effect of 10% increase in exchange rate Effect of 10% decrease in exchange rate Effect on profit before tax Effect on equity Effect on profit before tax Effect on equity $ $ $ $ (327,078) (784,012) (89) (5,562) (327,078) (784,012) (89) (5,562) 399,768 958,237 108 6,798 399,768 958,237 108 6,798 (1,116,740) (1,116,740) 1,364,912 1,364,912 (13,839) (313,393) – – (13,839) (313,393) – – 16,967 383,040 – – 16,967 383,040 – – (327,232) (327,232) 400,007 400,007 2015 United States Dollars Great British Pounds Indonesian Rupiah Malaysian Ringgit 2014 United States Dollars Great British Pounds Indonesian Rupiah Malaysian Ringgit Interest rate risk The board has considered the consolidated entity’s exposure to interest rate risk by analysing the effect on profit and equity of an interest rate increase or decrease of one percentage point in the following table: consolidated – 2015 Interest revenue Interest expense consolidated – 2014 Interest revenue Interest expense Effect of 1% increase in exchange rate Effect of 1% decrease in exchange rate Effect on profit before tax Effect on equity Effect on profit before tax Effect on equity $ $ $ $ 334,487 (1,317) 333,170 334,487 (1,317) 333,170 (334,487) 1,314 (333,173) (334,487) 1,314 (333,173) 396,849 396,849 (396,849) (396,849) – – – – 396,849 396,849 (396,849) (396,849) 55 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 24. FINANCIAL INSTRUMENTS (continued) Equity price risk The consolidated entity is exposed to equity price risks arising from equity investments. The sensitivity analysis below has been determined based on the exposure of the consolidated entity to a 5% increase or decrease in equity prices at the end of the reporting period. • profit for the year ended 30 June 2015 would have been unaffected as the equity investments are classified as available- for-sale and no investments were disposed of or impaired; and • other comprehensive income for the year ended 30 June 2015 would increase by $117,360 (2014: $30,085) as a result of an increase of 5% in equity prices, and decrease by $117,360 (2014: $30,085) as a result of a decrease of 5% in equity prices. Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations, resulting in financial loss to the consolidated entity. The consolidated entity has adopted a policy of only dealing with creditworthy counterparties as a means of mitigating the risk of financial loss from defaults. The consolidated entity uses independent rating agencies, publicly available financial information and other trading records to rate its major customers. Legally binding contracts are entered into to determine payment terms in relation to major projects. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. The consolidated entity does not have significant credit risk exposure to any single counterparty or group of counterparties. Liquidity risk management Ultimate responsibility for liquidity risk management rests with the board of directors, which has established an appropriate liquidity risk management framework for the management of the consolidated entity’s short-, medium- and long-term funding and liquidity management requirements. The consolidated entity manages liquidity risk by maintaining adequate reserves and banking facilities, by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. Liquidity and interest rate risk tables The following tables detail the consolidated entity’s remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. Remaining contractual maturities Weighted average interest rate % Less than 6 months $ 6 to 12 months $ Over 12 months $ Total $ – 35,392,357 – – 35,392,357 6.42% 226,250 35,618,607 171,662 171,662 706,432 706,432 1,104,344 36,496,701 – 21,609,153 – – 21,609,153 9.23% 134,646 21,743,799 153,320 153,320 247,412 247,412 535,378 22,144,531 Non-derivatives consolidated – 2015 Non-interest bearing Trade payables Interest-bearing – fixed rate Lease liability Total non-derivatives consolidated – 2014 Non-interest bearing Trade payables Interest-bearing – fixed rate Lease liability Total non-derivatives 56 Fair value of financial instruments The fair values of financial assets and liabilities, together with their carrying amounts in the statement of financial position, for the consolidated entity are as follows: consolidated Assets Cash at bank Cash on deposit Trade receivables 2015 2014 carrying amount $ Fair value $ carrying amount $ Fair value $ 40,610,353 40,610,353 12,693,955 12,693,955 23,972,641 23,972,641 19,500,000 19,500,000 26,038,936 26,038,936 38,565,885 38,565,885 Available for sale securities 2,347,202 2,347,202 601,704 601,704 92,969,132 92,969,132 71,361,544 71,361,544 Liabilities Trade payables Lease liability 35,392,357 35,392,357 21,609,153 21,609,153 1,104,344 1,104,344 535,378 535,378 36,496,701 36,496,701 22,144,531 22,144,531 For financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; • Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and • Level 3 inputs are unobservable inputs for the asset or liability. GR ENGiNEERiNG SERvicES LimiTEd ANNUAL REPORT 2015 57 nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 24. FINANCIAL INSTRUMENTS (continued) Fair value of financial instruments (continued) The financial assets and liabilities of the consolidated entity are classified into these categories below: Level 1 $ Level 2 $ Level 3 $ Total $ Fair value hierarchy – 2015 Financial assets Trade receivables Available for sale securities Financial liabilities Trade payables Lease liability Fair value hierarchy – 2014 Financial assets Trade receivables Available for sale securities Financial liabilities Trade payables Lease liability – 26,038,936 2,347,202 2,347,202 – 26,038,936 – – – 35,392,357 1,104,344 36,496,701 – 38,565,885 601,704 601,704 – 38,565,885 – – – 21,609,153 535,378 22,144,531 – – – – – – – – – – – – 26,038,936 2,347,202 28,386,138 35,392,357 1,104,344 36,496,701 38,565,885 601,704 39,167,589 21,609,153 535,378 22,144,531 The fair values of the financial assets and financial liabilities included in the level 2 and level 3 categories above have been determined in accordance with generally accepted pricing models based on a discounted cash flow analysis, with the most significant inputs being the discount rate that reflects the credit risk of counterparties. The consolidated entity holds available for sale equity securities of $2,347,202 (30 June 2014: $601,704) which are classified as fair value hierarchy level 1, in which fair values are based on quoted prices in active markets. There have been no transfers of fair value hierarchy levels during the period. During the period, net gains of $346,848 (30 June 2014: net loss $142,852) have been included in other comprehensive income and are reported in the investment revaluation reserve. 58 NOTE 25. KEY MANAGEMENT PERSONNEL DISCLOSURES Directors The following persons were directors of GR Engineering Services Limited during the financial year: Executive directors Joe Ricciardo Tony Patrizi Geoff Jones Non-Executive Chairman Executive Director Managing Director Non-executive directors Barry Patterson Terry Strapp Peter Hood Non-Executive Director Non-Executive Director Non-Executive Director Other key management personnel The following persons also had the authority and responsibility for planning, directing and controlling the major activities of the consolidated entity, directly or indirectly, during the financial year: Executives David Sala Tenna Paul Newling Joe Totaro Rodney Schier General Manager EPC Division General Manager EPCM Division Chief Financial Officer and Company Secretary Engineering Manager Remuneration of key management personnel Information on remuneration of key management personnel is set out in the Remuneration Report in the Directors Report. The aggregate compensation made to key management personnel of the consolidated entity is set out below: Short term benefits Post employment benefits Share based payments Other consolidated 2015 $ 2014 $ 2,329,156 2,342,058 167,810 176,082 – 138,432 469,499 – 2,673,048 2,949,989 59 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd cONTiNUEd NOTE 26. REMUNERATION OF AUDITORS During the financial year the following fees were paid or payable for services provided by Deloitte Touche Tohmatsu, the auditor of the company, and its network firms: Audit services – Deloitte Touche Tohmatsu Audit or review of the financial statements Other services – Deloitte Touche Tohmatsu Tax compliance Other services consolidated 2015 $ 2014 $ 112,627 126,123 30,450 26,250 169,327 26,171 5,000 157,294 NOTE 27. CONTINGENT LIABILITIES The consolidated entity has bank guarantees in place as at 30 June 2015 of $29,737,896 (2014: $19,522,985). The consolidated entity has a bank guarantee facility with the National Australia Bank to provide bank guarantees to support project performance in favour of certain clients of the consolidated entity. The facility has an approved limit of $40,000,000. The facility is secured by a fixed and floating charge over all the assets of the consolidated entity. The amount of bank guarantees issued under this facility at 30 June 2015 is $28,800,581 (2014: $18,856,451). The consolidated entity has a bank guarantee facility with National Australia Bank to provide guarantees for the security of rental properties to the value of $937,315 (2014: $666,534). The amount of bank guarantees issued under this facility at 30 June 2015 is $937,315 (2014: $666,534). The consolidated entity has a $30,000,000 insurance bond facility with Assetinsure Pty Ltd (2014: $20,000,000). This facility has been utilised to provide retention and off site materials bonds in connection with certain projects. The amount of insurance bonds issued under this facility at 30 June 2015 is $14,912,256 (2014: $13,597,040). GR Engineering Services Limited, the parent company, has provided guarantees and indemnities in relation to certain contracts entered into by its subsidiaries. Liability under these guarantees and indemnities is limited to the relevant subsidiaries’ contracted limits of liability under the contracts. 60 NOTE 28. COMMITMENTS The consolidated entity has leased certain of its office equipment under finance leases. The average lease term is 3 years (2014: 3 years). The consolidated entity has options to purchase the equipment for a nominal amount at the end of the lease terms. The consolidated entity’s obligations under finance leases are secured by the lessors’ title to the leased assets. Finance Leases Not longer than 1 year Longer than 1 year and not longer than 5 years Longer than 5 years Minimum lease payments Less: future finance charges Present value of minimum lease payments The consolidated entity has operating leases that relate to leases of office buildings with lease terms of between 1 and 5 years. All operating lease contracts contain clauses for market rental reviews. Non-cancellable Operating Lease commitments Not longer than 1 year Longer than 1 year and not longer than 5 years Longer than 5 years Total lease payments consolidated 2015 $ 435,514 737,675 – 2014 $ 425,877 574,515 – 1,173,189 1,000,392 (68,846) 1,104,344 (92,036) 908,356 1,913,651 2,222,302 – 1,612,634 1,843,515 – 4,135,953 3,456,149 GR ENGiNEERiNG SERvicES LimiTEd ANNUAL REPORT 2015 61 nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 29. RELATED PARTY TRANSACTIONS During the year ended 30 June 2015 the consolidated entity leased office space at 71-73 Daly Street from Ashguard Pty Ltd. Directors of the consolidated entity, namely Joe Ricciardo, Tony Patrizi, and Barry Patterson, each have a non controlling interest in Ashguard Pty Ltd. The total amount invoiced by Ashguard Pty Ltd in the year ended 30 June 2015 amounted to $314,263 including GST (2014: $300,847). The balance payable at 30 June 2015 is $46,054 (2014: $22,570). During the year ended 30 June 2015 the consolidated entity procured items for Ashguard Pty Ltd. The total amount invoiced to Ashguard Pty Ltd in the year ended 30 June 2015 was $10,998 including GST (2014: Nil). The balance outstanding at 30 June 2015 is Nil (2014: Nil). During the year ended 30 June 2015 the consolidated entity procured items and hired equipment from PIHA Pty Ltd (a subsidiary of Mineral Resources Limited), a company in which Joe Ricciardo is a non-executive director. The total amount invoiced by PIHA Pty Ltd in the year ended 30 June 2015 amounted to $240,664 including GST (2014: Nil). The balance payable at 30 June 2015 is $237,936 (2014: Nil). During the year ended 30 June 2015 the consolidated entity provided engineering services and procurement of materials for PIHA Pty Ltd. The total amount invoiced to PIHA Pty Ltd in the year ended 30 June 2015 was $41,083 including GST (2014: $80,300). The balance outstanding at 30 June 2015 is Nil (2014: $48,180). During the year ended 30 June 2015 the consolidated entity provided engineering services and procurement of materials for Crushing Services International Pty Ltd (a subsidiary of Mineral Resources Limited), a company in which Joe Ricciardo is a non-executive director. The total amount invoiced to Crushing Services International Pty Ltd in the year ended 30 June 2015 was $151,580 including GST (2014: $153,274). The balance outstanding at 30 June 2015 is Nil (2014: Nil). During the year ended 30 June 2015 the consolidated entity provided engineering services and procurement of materials for Azumah Resources Limited, a company in which Geoff Jones is a non-executive director. The total amount invoiced to Azumah Resources Limited in the year ended 30 June 2015 was $204,886 including GST (2014: $26,848). The balance outstanding at 30 June 2015 is Nil (2014: $19,750). During the year ended 30 June 2015 the consolidated entity provided engineering services and procurement of materials for Optiro Pty Ltd, a company in which Joe Ricciardo and Tony Patrizi each hold non-controlling interests. The total amount invoiced to Optiro Pty Ltd in the year ended 30 June 2015 was $9,680 including GST (2014: Nil). The balance outstanding at 30 June 2015 is $9,680 (2014: Nil). During the year ended 30 June 2015 the consolidated entity provided engineering services and procurement of materials for Marindi Metals Limited (previously Brumby Resources Limited), a company in which Geoff Jones is a non-executive chairman. The total amount invoiced to Marindi Metals Limited in the year ended 30 June 2015 was $56,562 including GST (2014: Nil). The balance outstanding at 30 June 2015 is Nil (2014: Nil). During the year ended 30 June 2015 the consolidated entity provided engineering services and procurement of materials for Dacian Gold Limited, a company in Barry Patterson is a non-executive director. The total amount invoiced to Dacian Gold Limited in the year ended 30 June 2015 was $7,420 including GST (2014: Nil). The balance outstanding at 30 June 2015 is Nil (2014: Nil). The terms of these arrangements are at arms length and at normal commercial terms. Other than transactions with parties related to key management personnel mentioned above and in the remuneration report, there have been no other transactions with parties related to the consolidated entity in the financial year ending 30 June 2015. 62 NOTE 30. PARENT ENTITY INFORMATION The accounting policies of the parent entity, which have been applied in determining the financial information shown below, are the same as those applied in the consolidated financial statements. Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit after income tax Total comprehensive income Statement of profit or loss and other comprehensive income Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Performance rights reserve Share options reserve Share appreciation rights reserve Investment revaluation reserve Retained profits Total equity Parent 2015 $ 2014 $ 11,374,906 10,903,101 11,374,906 10,903,101 73,873,257 50,098,295 79,002,083 57,325,565 35,404,692 12,273,240 35,539,586 13,364,248 28,918,256 28,785,355 984,762 584,497 79,978 203,996 590,246 545,500 82,291 (142,853) 12,691,008 14,100,778 43,462,497 43,961,317 The contingent liabilities and commitments of the parent entity are the same as those of the consolidated entity, as set out in Notes 27 and 28. NOTE 31. EVENTS AFTER THE REPORTING PERIOD Dividend declaration On 20 August 2015, the consolidated entity declared a fully franked dividend of 5.0 cents per share, an aggregate of $7,536,627. The Record Date of the dividend is 11 September 2015 and the proposed payment date is 25 September 2015. No other matter or circumstance has arisen since 30 June 2015 that has significantly affected, or may significantly affect the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. 63 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 32. EARNINGS PER SHARE Profit after income tax attributable to the owners of GR Engineering Services Limited Weighted average number of ordinary shares used in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Weighted average number of employee performance rights and share appreciation rights issued Weighted average number of ordinary shares used in calculating diluted earnings per share Basic earnings per share Diluted earnings per share NOTE 33. SHARE-BASED PAYMENTS consolidated 2015 $ 2014 $ 12,937,651 14,163,586 Number Number 150,408,838 150,001,118 3,237,064 2,879,512 153,645,902 152,880,630 cents 8.60 8.42 cents 9.44 9.26 An Equity Incentive Plan was adopted by the consolidated entity on 28 March 2012. At the discretion of the Board, all eligible employees of the consolidated entity or eligible consultants may participate in the Plan. Non-executive directors are not eligible to participate in the Plan. The Plan is designed to align the interests of executives and employees with the interests of shareholders by providing an opportunity to receive an equity interest in the consolidated entity and therefore direct participation in the benefits of future consolidated entity performance over the medium to long term. The consolidated entity issued a total of 2,215,000 performance rights on 11 September 2012 to a total of 86 employees and long term contractors under an Equity Incentive Plan. Each right entitles the employee to acquire one fully paid share in the consolidated entity for Nil consideration, subject to the employees meeting a service term of three years from the date of grant. A further 50,000 rights were issued to two employees on 4 October 2012. A third tranche of 50,000 rights were issued to an employee on 13 May 2013, these tranches of rights have a three year service term from the date of issue. On 30 April 2014 four further tranches of 127,500 rights each were issued to two employees. These tranches each have varying service terms of 2, 3, 4 and 5 years from the date of issue. A total of 530,000 performance rights have lapsed due to resignations and redundancies of entitled employees since the date of issue of the first tranche of rights. Of this total, 20,000 have lapsed in the financial year ending 30 June 2015 (2014: 270,000). 64 A summary of performance rights on issue at 30 June 2015 follows: Number issued Number lapsed Tranche 1 Tranche 2 Tranche 3 Tranche 4 Tranche 5 Tranche 6 Tranche 7 2,215,000 50,000 50,000 127,500 127,500 127,500 127,500 (505,000) (25,000) – – – – – Grant date 11/09/2012 04/10/2012 13/05/2013 30/04/2014 30/04/2014 30/04/2014 30/04/2014 Exercise price Nil Nil Nil Nil Nil Nil Nil Vesting date 21/09/2015 04/10/2015 13/05/2016 31/03/2016 31/03/2017 31/03/2018 31/03/2019 Expiry date 21/09/2015 04/10/2015 13/05/2016 31/03/2016 31/03/2017 31/03/2018 31/03/2019 Vesting period (years) Vesting conditions Fair value 3 Nil 3 Nil 3 Nil 2 Nil 3 Nil 4 Nil 5 Nil $0.637 $0.689 $0.459 $0.571 $0.511 $0.458 $0.410 The fair value of performance rights granted during the year was calculated using a Black-Scholes pricing model applying inputs as follows: Tranche 1 Tranche 2 Tranche 3 Tranche 4 Tranche 5 Tranche 6 Tranche 7 Grant date share price Exercise price Expected volatility Term (years) Dividend yield Risk free interest rate $0.86 – 50% 3 10% $0.86 – 50% 3 10% $0.58 $0.705 $0.705 $0.705 $0.705 – 50% 3 10% – 60% 2 11% – 60% 3 11% – 60% 4 11% – 60% 5 11% 2.55% 2.49% 2.57% 2.73% 2.95% 3.33% 3.33% 65 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015nOtES tO thE FinanCial StatEmEntS FOR THE YEAR ENdEd 30 JUNE 2015 cONTiNUEd NOTE 33. SHARE-BASED PAYMENTS (continued) Movement in performance rights consolidated Balance at beginning of year Granted during the year Forfeited during the year Balance at end of year 2015 2014 Number of performance rights 2,315,000 – (20,000) 2,295,000 Weighted average exercise price Number of performance rights Weighted average exercise price – – – – 2,075,000 510,000 (270,000) 2,315,000 – – – – The weighted average fair value of performance rights granted at 30 June 2015 is $0.60. The weighted average exercise price of these performance rights at 30 June 2015 is Nil. The weighted average remaining contractual life of performance rights outstanding at 30 June 2015 is 254 days. On 12 November 2013, the consolidated entity issued a total of 3,269,337 share appreciation rights to Geoff Jones, Managing Director, as part of the consolidated entity’s equity incentive plan. Of this total, 727,273 vested during the financial year ending 30 June 2015 (2014: 1,600,000). The share appreciation rights are subject to vesting conditions, namely the participant being employed by the consolidated entity as Managing Director and the share price being equal to or greater than the exercise price at the vesting date. Number of share appreciation rights Grant date vesting date Exercise price Performance condition share price targets Fair value at grant date 1,600,000 12 Nov 2013 30 Jun 2014 727,273 432,433 296,297 213,334 12 Nov 2013 30 Jun 2015 12 Nov 2013 30 Jun 2016 12 Nov 2013 30 Jun 2017 12 Nov 2013 30 Jun 2018 $0.50 $0.50 $0.50 $0.50 $0.50 $0.60 $0.72 $0.86 $1.04 $1.24 $0.18 $0.18 $0.18 $0.16 $0.15 The fair value of share appreciation rights granted during the year was calculated using a Monte Carlo pricing model applying inputs as follows: Grant date share price ($) Exercise price ($) Expected volatility (%) Vesting period (years) Dividend yield (%) Risk free interest rate (%) class A class B class c class d class E 0.67 0.50 60 0 11 2.80 0.67 0.50 60 1 11 2.80 0.67 0.50 60 2 11 3.06 0.67 0.50 60 3 11 3.06 0.67 0.50 60 4 11 3.48 66 Movement in share appreciation rights consolidated 2015 2014 Number of share appreciation rights Weighted average exercise price Number of share appreciation rights Weighted average exercise price Balance at beginning of year 1,669,337 Granted during the year – Vested and exercised during the year Balance at end of year (727,273) 942,064 – – – – – 3,269,337 (1,600,000) 1,669,337 – – – – On the date of exercise of 727,273 of the above share appreciation rights, 30 June 2015, the closing share price was $0.90 per share. The weighted average fair value of share appreciation rights granted at 30 June 2015 is $0.17. The weighted average exercise price of these share appreciation rights at 30 June 2015 is $0.50. The weighted average remaining contractual life of share appreciation rights outstanding at 30 June 2015 is 646 days. NOTE 34. SUBSIDIARIES The consolidated financial statements incorporate the following subsidiaries at the end of the reporting period. country of incorporation 2015 % 2014 % Equity holding Name of subsidiary GR Engineering Services (Indonesia) Pty Limited GR Engineering Services (Argentina) Pty Limited PT GR Engineering Services Indonesia * GR Engineering Services (Africa) Australia Australia Indonesia Mauritius GR Engineering Services (UK) Limited United Kingdom GR Engineering Services (Ghana) Limited ** GR Engineering Services (Côte D’Ivoire) ** GR Engineering Services (Mali) ** GR Engineering Services (Tengrela) *** Upstream Production Solutions Pty Ltd **** Ghana Côte D’Ivoire Mali Côte D’Ivoire Australia Upstream Production Solutions (Malaysia) Sdn. Bhd. ***** Malaysia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 * ** PT GR Engineering Services Indonesia is 90% owned by GR Engineering Services Limited and 10% owned by GR Engineering Services (Indonesia) Pty Limited. GR Engineering Services (Ghana) Limited, GR Engineering Services (Côte D’Ivoire) and GR Engineering Services (Mali) are 100% owned by GR Engineering Services (Africa). *** GR Engineering Services (Tengrela) is dormant. **** Incorporation date 8 November 2013. ***** Incorporation date 14 April 2014. 67 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015 DiRECtORS’ DEClaRatiOn The directors declare that: a. in the directors’ opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; b. in the directors’ opinion, the attached financial statements are in compliance with International Financial Reporting Standards, as stated in Note 2 to the financial statements; c. in the directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the consolidated entity; and d. the directors have been given the declarations required by Section 295A of the Corporations Act 2001. Signed in accordance with a resolution of the directors made pursuant to Section 295(5) of the Corporations Act 2001. On behalf of the Directors Geoff Jones Managing Director 20 August 2015 68 inDEPEnDEnt aUDitOR’S REPORt Deloitte Touche Tohmatsu ABN 74 490 121 060 Woodside Plaza Level 14 240 St Georges Terrace Perth WA 6000 GPO Box A46 Perth WA 6837 Australia Tel: +61 8 9365 7000 Fax: +61 8 9365 7001 www.deloitte.com.au Independent Auditor’s Report to the members of GR Engineering Services Limited Report on the Financial Report We have audited the accompanying financial report of GR Engineering Services Limited, which comprises the statement of financial position as at 30 June 2015, the statement of profit or loss and other comprehensive income, the statement of cash flows and the statement of changes in equity for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity, comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 22 to 68. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 2, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the consolidated financial statements comply with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control, relevant to the company’s preparation of the financial report that gives a true and fair view, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 69 69 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015 inDEPEnDEnt aUDitOR’S REPORt Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of GR Engineering Services Limited, would be in the same terms if given to the directors as at the time of this auditor’s report. Opinion In our opinion: (a) the financial report of GR Engineering Services Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2015 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the consolidated financial statements also comply with International Financial Reporting Standards as disclosed in Note 2. Report on the Remuneration Report We have audited the Remuneration Report included in pages 11 to 19 of the directors’ report for the year ended 30 June 2015. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion the Remuneration Report of GR Engineering Services Limited for the year ended 30 June 2015, complies with section 300A of the Corporations Act 2001. DELOITTE TOUCHE TOHMATSU Neil Smith Partner Chartered Accountants Perth, 21 August 2015 70 70 Continued CORPORatE GOVERnanCE StatEmEnt APPROACH TO CORPORATE GOVERNANCE GR Engineering Services Ltd ABN 12 121 542 738 (company) has established a corporate governance framework, the key features of which are set out in this statement. In establishing its corporate governance framework, the Company has referred to the recommendations set out in the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations 3rd Edition (Principles & Recommendations). The Company has followed each recommendation where the Board has considered the recommendation to be an appropriate benchmark for its corporate governance practices. Where the Company’s corporate governance practices follow a recommendation, the Board has made appropriate statements reporting on the adoption of the recommendation. In compliance with the “if not, why not” reporting regime, where, after due consideration, the Company’s corporate governance practices do not follow a recommendation, the Board has explained it reasons for not following the recommendation and disclosed what, if any, alternative practices the Company has adopted instead of those in the recommendation. The following governance-related documents can be found on the Company’s website at www.gres.com.au, under the section marked “Corporate Governance”: Charters Board Audit and Risk Committee Nomination and Remuneration Committee Policies and Procedures Process for Performance Evaluations Policy and Procedure for the Selection and (Re)Appointment of Directors Induction Program Diversity Policy (summary) Code of Conduct (summary) Policy on Continuous Disclosure (summary) Compliance Procedures (summary) Shareholder Communication and Investor Relations Policy Securities Trading Policy The Company reports below on whether it has followed each of the recommendations during the 2014/2015 financial year (Reporting Period). The information in this statement is current at 20 August 2015. This statement was approved by a resolution of the Board on 20 August 2015. Cross-references to the Company’s Annual Financial Report in this statement are references to the Company’s Annual Financial Report for the year ended 30 June 2015, which is disclosed on the Company’s website www.gres.com.au, under the section marked “News”. PRINCIPLE 1 – LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT Recommendation 1.1 The Company has established the respective roles and responsibilities of its Board and management, and those matters expressly reserved to the Board and those delegated to management and has documented this in its Board Charter. Recommendation 1.2 The Company undertakes appropriate checks before appointing a person or putting forward to shareholders a candidate for election as a director and provides shareholders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a director. The checks which are undertaken, and the information provided to shareholders are set out in the Company’s Policy and Procedure for the Selection and (Re) Appointment of Directors. Recommendation 1.3 The Company has a written agreement with each director and senior executive setting out the terms of their appointment. The material terms of any employment, service or consultancy agreement the Company, or any of its child entities, has entered into with its Managing Director, any of its directors, and any other person or entity who is related party of the Managing Director or any of its directors has been disclosed in accordance with ASX Listing Rule 3.16.4 (taking into consideration the exclusions from disclosure outlined in that rule). 71 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015CORPORatE GOVERnanCE StatEmEnt PRINCIPLE 1 – LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT (continued) Recommendation 1.4 The Company Secretary is accountable directly to the Board, through the Chair, on all matters to do with the proper functioning of the Board as outlined in the Company’s Board Charter. Recommendation 1.5 The Company has a Diversity Policy, which includes requirements for the Nomination and Remuneration Committee to set measurable objectives for achieving gender diversity and to assess annually both the objectives and the Company’s progress in achieving them. A summary of the Company’s Diversity Policy is disclosed on the Company’s website. The following measurable objective for achieving gender diversity has been set by the Nomination and Remuneration Committee in accordance with the Diversity Policy: “Subject to the identification of suitable qualified candidates, to increase the percentage of professional and senior executive positions occupied by women to 15% by 30 June 2017.” The Board continues to work towards meeting this objective and continues to foster a workplace environment and recruitment policies designed to achieve greater female participation in the Company’s workforce. The respective proportions of men and women on the Board, in senior executive positions and across the whole organisation are set out in the following table. “Senior executive” for these purposes means a person who is a Key Management Employee, a General Manager or a member of Senior Management as defined by the Workplace Gender Equality Agency: Whole organisation Senior executive positions Board Recommendation 1.6 Proportion of women 39 out of 247 (16%) (16% as at 30 June 2014) 9 out of 91 (10%) (7% as at 30 June 2014) 0 out of 6 (0%) (0% as at 30 June 2014) The Chair is responsible for evaluation of the Board and, when deemed appropriate, Board committees and individual directors. The Chair is also responsible for evaluating the Managing Director. The Chair evaluates the performance of the Managing Director and other Board members through a series of discussions held throughout the year. These discussions include an assessment of the Company’s state of affairs, the risks facing the Company and its economic objectives. The Chair evaluates the extent to which each director has contributed to the efficient utilisation of resources, the identification of risk and the achievement of economic objectives. During these discussions the Chair also elicits confidential feedback from each Director on their view of the interpersonal dynamics between Board members and the quality of the Board’s decision making. During the Reporting Period the Chair evaluated the performance of all Directors, including the Managing Director, in accordance with the above process. Recommendation 1.7 The Managing Director is responsible for evaluating the performance of senior executives in accordance with the process disclosed in the Company’s Process for Performance Evaluations. During the Reporting Period the Managing Director conducted performance evaluations of Senior Executives. Where these evaluations resulted in the identification of areas where the Senior Executive’s technical or interpersonal skills could be strengthened, appropriate training or remedial action was formulated and agreed. 72 ContinuedPRINCIPLE 2 – STRUCTURE THE BOARD TO ADD VALUE Recommendation 2.1 The Board has established a Nomination and Remuneration Committee comprising Barry Patterson (Chair), Joseph Ricciardo, Terrence Strapp and Peter Hood. All members of the Nomination and Remuneration Committee are non-executive directors and all members are independent directors except Mr Ricciardo. Accordingly, the Nomination and Remuneration Committee is structured in accordance with Recommendation 2.1. The Board has adopted a Nomination and Remuneration Committee Charter which describes the role, composition, functions and responsibilities of the Nomination and Remuneration Committee and is disclosed on the Company’s website. The Nominations and Remuneration Committee held no separate meeting during the year electing instead to address matters for its consideration within the context of meetings of the full Board of Directors. Recommendation 2.2 The mix of skills and diversity that the Board currently has is a Board comprised of 5 qualified engineers and 1 qualified accountant. The matrix of skills held by the Board is weighted towards those skills which are required to identify, assess, quantify and manage those risks which are most relevant to and prevalent in the Company’s business and the industry in which it operates. Five of the Company’s six directors hold, or have held, positions on the boards of other publicly listed companies and all have extensive experience in the management of organisations across a range of industries. When necessary, the Board engages the services of external experts and consultants to augment its capacity to consider and assess matters which fall outside the domain of its collective expertise. Recommendation 2.3 The Board considers the independence of directors having regard to the relationships listed in Box 2.3 of the Principles & Recommendations. The independent directors of the Company are Messrs Patterson (deemed independent), Strapp and Hood. Mr Patterson is a substantial shareholder of the Company. Notwithstanding that he is a substantial shareholder the Board considers Mr Patterson to be an independent director because he is not a member of management and is otherwise free of any interest, position, association or relationship (including those listed in Box 2.3 of the Principles & Recommendations) that might influence in a material respect, his capacity to bring an independent judgement to bear on issues before the Board and to act in the best interests of the Company and its members generally. Further, Mr Patterson’s interests as a substantial shareholder are considered by the Board to be in line with the interests of all other shareholders. The length of service of each director is set out in the Directors’ Report of the Company’s Annual Financial Report. Recommendation 2.4 The Board does not have a majority of directors who are independent. The Board is comprised of 6 directors three of whom are or are deemed to be independent. The three non- independent directors are Joe Ricciardo, Tony Patrizi and Geoff Jones. Joe Ricciardo and Tony Patrizi are founding shareholders of the Company and Geoff Jones has been employed by the Company since 2011, initially as Chief Operating officer and since 01 July 2013, as Managing Director. Messrs Ricciardo, Patrizi and Jones have thorough knowledge of the Company’s business and extensive experience in managing the risks it faces. Their continued presence on the Board is therefore highly valued. The Board is of a size commensurate with the size and nature of the Company. Should the number of Board members increase, it is the intention of the Company to appoint an additional independent director thereby creating a majority of independent directors. Recommendation 2.5 The non-independent, non-executive Chair of the Board is Joseph Ricciardo. Mr Ricciardo is not also the Managing Director. However, Mr Ricciardo is not independent as he is a substantial shareholder of the Company. Mr Ricciardo is a founding shareholder of the Company and was its Managing Director until 30 June 2013. He has extensive knowledge of the Company’s business and experience in managing the risks it faces. Mr Ricciardo ensures that meetings of the Board are conducted to an agenda that is comprehensive and relevant, and also makes a contribution to the depth of the Board’s deliberations and quality of its decisions. For these reasons the Board considers Mr Ricciardo to be the most appropriate Chair of the Board, notwithstanding that he is not an independent director. 73 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015CORPORatE GOVERnanCE StatEmEnt PRINCIPLE 2 – STRUCTURE THE BOARD TO ADD VALUE (continued) Recommendation 2.6 The Company has an induction program for new directors and senior executives. The goal of the program is to assist new directors to participate fully and actively in Board decision-making at the earliest opportunity and to assist senior executives to participate fully and actively in management decision-making at the earliest opportunity. The Company’s Induction Program is disclosed on the Company’s website. The Nomination and Remuneration Committee regularly reviews whether the directors as a group have the skills, knowledge and familiarity with the Company and its operating environment required to fulfil their role on the Board and the Board committees effectively using a Board skills matrix. Where any gaps are identified, the Nomination and Remuneration Committee considers what training or development should be undertaken to fill those gaps. In particular, the Nomination and Remuneration Committee ensures that any director who does not have specialist accounting skills or knowledge has a sufficient understanding of accounting matters to fulfil his or her responsibilities in relation to the Company’s financial statements. Directors also receive ongoing briefings from the Company Secretary and Chief Financial Officer on developments in accounting standards. PRINCIPLE 3 – ACT ETHICALLY AND RESPONSIBLY Recommendation 3.1 The Company has established a Code of Conduct for its directors, senior executives and employees, which is disclosed on the Company’s website. PRINCIPLE 4 – SAFEGUARD INTEGRITY IN CORPORATE REPORTING Recommendation 4.1 The Board has established an Audit and Risk Committee. The members of the Audit and Risk Committee are Messrs Strapp (Chairman), Patterson and Hood. All members of the Audit and Risk Committee are independent non-executive directors and the Audit and Risk Committee is chaired by Mr Strapp who is not also Chairman of the Board. Accordingly, the Audit and Risk Committee is structured in compliance with Recommendation 4.1. Terrence Strapp (CPA, FFin, MAICD) is a Certified Practicing Accountant and has extensive experience in banking, finance and corporate risk management. Mr Strapp has extensive experience in the preparation and interpretation of financial statements and information. Peter Hood (BE (Chem), MAustIMM, FChemE, FAICD) is a Chemical Engineer and was formerly the Chief Executive Officer of Coogee Chemicals and Coogee Resources. He is currently the Chairman of the Australian Chamber of Commerce and Industry and Immediate Past President of the Chamber of Commerce and Industry Western Australia. Peter is currently Chairman of Matrix Composites and Engineering Limited. His broad based commercial experience includes the interpretation of financial statements and information. Barry Patterson (ASMM, MIMM, FAICD) is a mining engineer with over 50 years’ experience in mining and mining services. He was formerly non-executive Chairman of Sonic Healthcare Limited and Silex Systems Limited and is a non-executive director of Dacian Gold Limited. His broad based commercial experience includes the interpretation of financial statements and information. The Company has also established a Procedure for the Selection, Appointment and Rotation of its External Auditor. The Board is responsible for the initial appointment of the external auditor and the appointment of a new external auditor when any vacancy arises. Candidates for the position of external auditor must demonstrate complete independence from the Company through the engagement period. The Board may otherwise select an external auditor based on criteria relevant to the Company’s business and circumstances. The performance of the external auditor is reviewed on an annual basis by the Board. Details of the number of times the Audit and Risk Committee met during the Reporting Period, and individual director attendances at those meetings are disclosed in a table in the Directors’ Report of the Company’s Annual Financial Report. The Board has adopted an Audit and Risk Committee Charter which describes the Audit and Risk Committee’s role, composition, functions and responsibilities, which is disclosed on the Company’s website. 74 ContinuedRecommendation 4.2 Before the Board approved the Company financial statements for the half year ended 31 December 2014 and the full-year ended 30 June 2015, it received from the Managing Director and the Chief Financial Officer a declaration that, in their opinion, the financial records of the Company for the relevant financial period have been properly maintained and that the financial statements for the relevant financial period comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the Company and the consolidated entity and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. Recommendation 4.3 Under Section 250RA of the Corporations Act, the Company’s auditor is required to attend the Company’s annual general meeting at which the audit report is considered, and to be represented by a person who is a suitably qualified member of the audit team that conducted the audit and is in a position to answer questions about the audit. Each year, the Company writes to the Company’s auditor to inform them of the date of the Company’s annual general meeting. In accordance with Section 250S of the Corporations Act, at the Company’s annual general meeting where the Company’s auditor or their representative is at the meeting, the Chair allows a reasonable opportunity for the members as a whole at the meeting to ask the auditor (or its representative) questions relevant to the conduct of the audit; the preparation and content of the auditor’s report; the accounting policies adopted by the Company in relation to the preparation of the financial statements; and the independence of the auditor in relation to the conduct of the audit. The Chair also allows a reasonable opportunity for the auditor (or their representative) to answer written questions submitted to the auditor under Section 250PA of the Corporations Act. A representative of the Company’s auditor, Deloitte Touche Tohmatsu attended the Company’s annual general meeting held on 12 November 2014. PRINCIPLE 5 – MAKE TIMELY AND BALANCED DISCLOSURE Recommendation 5.1 The Company has established written policies and procedures for complying with its continuous disclosure obligations under the ASX Listing Rules. A summary of the Company’s Policy on Continuous Disclosure and Compliance Procedures are disclosed on the Company’s website at www.gres.com.au. PRINCIPLE 6 – RESPECT THE RIGHTS OF SECURITY HOLDERS Recommendation 6.1 The Company provides information about itself and its governance to investors via its website at www.gres.com.au as set out in its Shareholder Communication and Investor Relations Policy. Recommendation 6.2 The Company has designed and implemented an investor relations program to facilitate effective two-way communication with investors. The program is set out in the Company’s Shareholder Communication and Investor Relations Policy. Recommendation 6.3 The Company has in place a Shareholder Communication and Investor Relations Policy which outlines the policies and processes that it has in place to facilitate and encourage participation at meetings of shareholders. Recommendation 6.4 Shareholders are given the option to receive communications from, and send communications to, the Company and its share registry electronically. This is facilitated through the Company’s website which provides access to the Company’s and its share registry’s full range of contact details, including email address. 75 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015CORPORatE GOVERnanCE StatEmEnt PRINCIPLE 7 – RECOGNISE AND MANAGE RISK Recommendation 7.1 As noted above, the Board has established a combined Audit and Risk Committee. The Audit and Risk Committee is structured in accordance with Recommendation 7.1. Please refer to the disclosure above in relation to Recommendation 4.1 in relation to the Audit and Risk Committee. Recommendation 7.2 The Audit and Risk Committee reviews the Company’s risk management framework annually to satisfy itself that it continues to be sound, to determine whether there have been any changes in the material business risks the Company faces and to ensure that the Company is operating within the risk appetite set by the Board. The Audit and Risk Committee carried out a review during the Reporting Period. The Audit and Risk Committee noted the increased risk to the Company due to the increased potential of breaches of cyber security and has recommended that counter measures be taken to mitigate that risk. Recommendation 7.3 The Company does not have an internal audit function. To evaluate and continually improve the effectiveness of the Company’s risk management and internal control processes, the Board relies on ongoing reporting and discussion of the management of material business risks as outlined in the Company’s Risk Management Policy. Recommendation 7.4 The Company provides engineering and construction services to the mining industry and operations and maintenance services to the oil and gas industry, including producers of coal seam gas. These activities expose the Company, directly and indirectly to environmental, social and economic sustainability risks, which may materially impact the Company’s ability to create or preserve value for shareholders over the short, medium or long term. In relation to the provision of goods and services, these risks are mitigated by virtue of the Company entering a project’s life cycle at a stage where all environmental, social and economic requirements of the relevant jurisdiction have been met by the client. The Company does not provide goods and services in circumstances where this is not the case and to that extent, the Company is in a position to continue its business activities in an environmentally, socially and economically sustainable manner. In relation to the Company’s suppliers, the Company takes due care to ensure that the goods and services required for the conduct of its business are sourced from entities which act fairly and responsibly within the environments, societies and economies in which they operate thereby mitigating sustainability risks in relation to these factors. The Company aims to operate in a socially sustainable way by engaging with the local communities and wherever possible providing employment and training opportunities to members of the local community. In doing so, the Company operates within the framework of local norms and customs and endeavours to ensure that its clients do likewise. The Company will not participate in any activity where it is likely to receive either directly or indirectly, economic benefit through the exploitation of others. 76 ContinuedPRINCIPLE 8 – REMUNERATE FAIRLY AND RESPONSIBLY Recommendation 8.1 As noted above in relation to Recommendation 2.1, the Board has established a Nomination and Remuneration Committee. The Nomination and Remuneration Committee is structured in compliance with Recommendation 8.1. Please refer to the disclosure above in relation to Recommendation 2.1 in relation to the Nomination and Remuneration Committee. Recommendation 8.2 Details of remuneration, including the Company’s policy on remuneration, are contained in the “Remuneration Report” which forms of part of the Directors’ Report in the Company’s Annual Financial Report. This disclosure includes a summary of the Company’s policies regarding the deferral of performance-based remuneration and the reduction, cancellation or clawback of the performance-based remuneration in the event of serious misconduct or a material misstatement in the Company’s financial statements. Under the terms of the GR Engineering Services Limited Equity Incentive Plan (Plan), if in the opinion of the Board a participant acts fraudulently or dishonestly or wilfully breaches his or her duties to the Company, the Board may in its absolute discretion determine that all unvested or unexercised performance rights or share appreciation rights held by the participant will lapse. In addition to the provisions under the Plan, the Board has adopted a clawback policy in relation to any cash bonuses or shares issued pursuant to the Plan. Under this policy the Board reserves the right to take action to reduce, recoup or otherwise adjust the employees performance based remuneration in circumstances where in the opinion of the Board, an employee has acted fraudulently or dishonestly or has wilfully breached his or her duties to the Company. Recommendation 8.3 The Company’s Remuneration Committee Charter includes a statement of the Company’s policy on prohibiting participants in the Plan entering into transactions (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the Plan. GR ENGiNEERiNG SERvicES LimiTEd ANNUAL REPORT 2015 77 aDDitiOnal aSX inFORmatiOn The shareholder information set out below was applicable as at 28 September 2015: • the twenty largest shareholders held 84.93% of the Ordinary Shares; and • there were 1,197 ordinary shareholders. distribution of securities Analysis of number of equity security holders by size of holding: Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – 1,000,000 1,000,001 – 100,000,000 Total Total 198 376 214 366 32 17 1,203 Units 147,358 1,138,455 1,783,150 12,348,990 10,073,479 126,934,654 152,426,086 % of shares issued 0.10 0.75 1.17 8.10 6.61 83.26 100.00 The number of shareholders holding less than a marketable parcel of ordinary shares is 42. Equity security holders Top 20 Shareholders as at 28 September 2015: Name 1. Citicorp Nominees Pty Ltd 2. Mr David Joseph Sala Tenna + Ms Jane Frances Sala Tenna 3. 4. 5. 6. 7. Joley Pty Ltd Polly Pty Ltd Quintal Pty Ltd Paksian Pty Ltd Kingarth Pty Ltd 8. Mr Giuseppe Totaro 9. Ms Barbara Ann Woodhouse 10. Ms Beverley June Schier 11. Ledgking Pty Ltd 12. Mr Stephen Paul Kendrick 13. JP Morgan Nominees Australia Limited 14. National Nominees Limited 15. HSBC Custody Nominees (Australia) Limited – Commonwealth Super Corp 16. HSBC Custody Nominees (Australia) Limited 17. Kendrick Investments Pty Ltd 18. Mr Cono Antonino Angelo Ricciardo 19. Mr Cono Antonino Angelo Ricciardo + Mr Brett Alan Turner 20. Kingarth Pty Ltd Number of shares held % of shares issued 16,309,415 13,825,000 12,000,000 10,500,000 10,500,000 9,798,578 9,025,000 9,000,000 8,150,000 8,100,000 6,000,000 3,491,000 3,374,502 2,207,166 1,728,537 1,541,455 1,384,000 980,000 772,109 770,000 10.70 9.07 7.87 6.89 6.89 6.43 5.92 5.90 5.35 5.31 3.94 2.29 2.21 1.45 1.13 1.01 0.91 0.64 0.51 0.51 129,180,012 84.93 78 Substantial shareholders Name 1. Citicorp Nominees Pty Ltd 2. Mr David Joseph Sala Tenna + Ms Jane Frances Sala Tenna 3. 4. 5. 6. 7. Joley Pty Ltd Polly Pty Ltd Quintal Pty Ltd Paksian Pty Ltd Kingarth Pty Ltd 8. Mr Giuseppe Totaro 9. Ms Barbara Ann Woodhouse 10. Ms Beverley June Schier voting rights Number of shares held % of shares issued 16,309,415 13,825,000 12,000,000 10,500,000 10,500,000 9,798,578 9,025,000 9,000,000 8,150,000 8,100,000 10.70 9.07 7.87 6.89 6.89 6.43 5.92 5.90 5.35 5.31 The voting rights attached to ordinary shares are set out below: Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Options over ordinary shares There are no voting rights attached to Options over the consolidated entity’s shares. Performance rights There are no voting rights attached to Performance Rights over the consolidated entity’s shares. Share appreciation rights There are no voting rights attached to Share Appreciation Rights over the consolidated entity’s shares. Options on issue There are Nil options on issue at 30 June 2015. Performance rights The following performance rights are on issue: Number 50,000 127,500 127,500 127,500 127,500 Grant date 13 May 2013 30 Apr 2014 30 Apr 2014 30 Apr 2014 30 Apr 2014 Share appreciation rights The following share appreciation rights are on issue: Number 432,433 296,297 213,334 Grant date 12 Nov 2013 12 Nov 2013 12 Nov 2013 Expiry date 13 May 2016 31 Mar 2016 31 Mar 2017 31 Mar 2018 31 Mar 2019 Expiry date 30 Jun 2016 30 Jun 2017 30 Jun 2018 Exercise price – – – – – Exercise price – – – 79 GR EnGinEERinG SERvicES LimitEd AnnUAL REPORt 2015CORPORatE DiRECtORY GR ENGINEERING SERVICES LIMITED PRINCIPAL PLACE OF BUSINESS ACN 121 542 738 ABN 12 121 542 738 DIRECTORS Joe Ricciardo Geoff Jones Tony Patrizi Barry Patterson Peter Hood Terrence Strapp (Non-Executive Chairman) (Managing Director) (Executive Director) (Non-Executive Director) (Non-Executive Director) (Non-Executive Director) COMPANY SECRETARY & CHIEF FINANCIAL OFFICER Giuseppe (Joe) Totaro REGISTERED OFFICE 179 Great Eastern Highway BELMONT WA 6104 179 Great Eastern Highway BELMONT WA 6104 Telephone: Facsimile: Email: Website: (61 8) 6272 6000 (61 8) 6272 6001 gres@gres.com.au www.gres.com.au ASX CODE GNG AUDITOR deloitte Touche Tohmatsu Level 14, 240 St Georges Terrace PERTH WA 6000 SOLICITORS TO THE COMPANY Gilbert + Tobin 1202 Hay Street WEST PERTH WA 6005 SHARE REGISTRY computershare investor Services Pty Limited Level 11, 172 St Georges Terrace PERTH WA 6000 ON-MARKET BUYBACK The consolidated entity has no current on-market buy back scheme. RESTRICTED SECURITIES There are no securities subject to any voluntary escrow or any transfer restrictions. 80 Safety is a key element of GR Engineering’s operating ethos – our people are our greatest asset. gres.com.au G R E n g i n e e r i n g S e r v i c e s L i m i t e d A N N U A L R E P O R T 2 0 1 5

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